Global Wine Glut: The Return of Crisis Distillation

September 26, 2023 By Mike Veseth in economic crisis, wine, wine history, wine markets 1 Comment

Crisis distillation is back in the news. For those unfamiliar with this wine business term, crisis distillation refers to government programs that buy surplus wine and distill it into industrial alcohol. The point isn’t to increase industrial alcohol supplies but to support prices and incomes in the wine sector by taking excess supply off the market.

Crisis distillation has a long history in the European Union. You might remember that some countries authorized crisis distillation just a few years ago during the COVID-19 pandemic. Public health restrictions hit on-trade wine very hard in some places where producers rely heavily on bar and restaurant sales (a more significant factor in Europe than here in the U.S.). The crisis was short-lived, but distillation was a significant factor while it lasted.

Distillation was a persistent feature twenty years ago, however. EU price support programs encouraged the production of low-quality wines that were poorly suited to highly competitive market conditions. Distillation programs bought the surplus wine that resulted. It was an expensive way to stabilize wine-grower income and, for a while at least, it seemed like it would go on forever, getting more and more costly each year.

It was reported at the time that Britain’s Prince (now King) Charles had his Aston Martin configured to run on a grape alcohol-rich fuel blend. Plonk power! I wonder what other uses they found for the enormous quantity of distilled wine that was produced?

The distillation policy was changing when The Wine Economist first appeared back in 2007. I have inserted a column below that was first posted on Christmas Eve of that year, which I think you might find useful to read for perspective on the current situation. The combination of supply adjustment and demand-based policy reforms did in fact address the critical issues and crisis distillation slowly disappeared from the wine business lexicon.

Distillation is back, but things are very different today. This wine glut today is caused more by stagnant and falling demand than by high supply, for example. And the quality issue is different, too. Back in the 2000s, the issue was poor quality wines that were hard to sell at any price. As you can read below, one part of the solution was an effort to eliminate these wines and raise quality and marketability. These efforts (magnified by the market premiumization trend) have been relatively successful. Now Sue and I routinely encounter excellent wines from regions that only a short while ago were better known for plonk.

What was important about the policies I discussed back in 2007 was that they addressed the causes of the problems that the EU wine industry faced. Crisis distillation today treats the impact of today’s issues in terms of surplus wine, but the causes (and therefore, I suppose, the cures) have not yet been directly addressed.

Distillation buys time. Spend it wisely. Here’s that 2007 column.

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Draining Europe’s Wine Lake

Wine Economist / December 24, 2007

Europe is afloat in a sea of bad wine and the European Union agriculture ministers agreed last week to do something about it. But is it too little and too late?

Marian Fischer Boel, the EU Agriculture Minister, proposed a number of fairly radical reforms in 2006 and these were the basis of the discussion. She wanted an immediate end to distillation subsidies and a vast program to encourage small winegrowers to pull up their vines — one million acres — replacing them with other crops or, in some cases, with more marketable grape varieties. Perhaps predictably, the policies agreed last week are much weaker than the original proposals. Distillation subsidies will be phased out over five years and as many as 400,000 acres of vines will be “grubbed up.” Four hundred thousand acres seems like a lot, but given the size of the problem is it, as Wine Spectator reported, just “a good start?”

Current EU policies are as useless as the old wine barrels shown above. At the top end of the market, national and EU policies tend to stifle innovation and prevent effective market adjustment (the counter argument is that they preserve tradition and prevent destructive commercialization). I have read any number of stories about high end European winemakers who have expanded abroad in part to escape regulations on what they can produce, where, and how they can market it.

In the mid-market, where current attention is focused, EU and national regulations seem to prevent winemakers from achieving the transparency that an increasing global market requires. It is hard enough to know what’s in a bottle of wine without the complicated rules that government European wine labeling. French wines are typically “branded” by place of origin, not grape varietal, for example. Buyers who are not confident about their French geographical knowledge and the relationship between place, grape variety and wine style, are likely to choose New World wines with more easily understood characteristics. Australian wines sell well in France partly for this reason.

At the low end of the market, EU policies designed to support farm incomes have produced the famous “wine lake.” Each year the EU spends about $2 billion to buy up unsold wines and turn them into industrial alcohol. This vast reliable market for poor quality wine keeps thousands of small scale producers in business. The distillation subsidy insulates low-end producers from market forces with the result that the vineyards remain uneconomically small, the practices favor quantity over quality, and the wine, while it may reflect local tradition, finds few buyers in the marketplace. Cheap New World wine is preferred to bad Old World plonk.

The new EU policies are designed to drain the wine lake by making the wine sector more responsive to market forces. Label laws and regulations will be reformed so that European wines can be sold by regional and grape varietal just like New World wines. The distillation subsidy will be phased out over four years, with some of the subsidy funds returned to regional groups to be used in wine marketing and promotion efforts. And up to 400,000 acres of vineyards will be included in the new “vine-pull scheme.” New plantings will be allowed over time, but they will be market-driven not subsidy-driven.

The top end of the market is unlikely to be affected very much by these policies, since by definition they already have established brands and distribution channels. New label laws and subsidy reductions will have few direct effects on these producers, although they may be able to gain indirectly as vineyard consolidation takes place and Australian-style brands grow in importance. I predict that the most visible early effect of the new rules will be expansion of European brands both at home and in export markets.

The clear gainers are the mid-market producers — the wines that sell for about $12. There is great potential profit in this part of the market, which is expanding rapidly in the New World. Freed from the constraints of tradition, European winemakers should be able to compete in this market quite well. It is, however, a hotly contested market segment. European producers will need to use their new freedom well to succeed and those who choose not to adjust may suffer as the European market realigns itself.

The real problem is at the bottom of the market. Losing the distillation subsidies will hurt many producers and I don’t know how enough about the cost-benefit of the vine-pulling schemes to comment. Pulling 400,000 acres out of wine production should help stabilize the market by reducing the annual surplus, but I don’t know if it is enough and I don’t know if the incentives provided are strong enough.

Four hundred thousand acres — how big is that? Huge if you are thinking New World — Australia had just 388,000 acres of vineyards altogether in 2003 according to my Oxford Companion. But tiny if you think Old World — and of course this is an Old World problem. Italy and France had more than 2 million acres of vines each in 2003. (The Languedoc region in the south of France has 528,000 acres by itself.) Taking 400,000 acres out of production in Europe is like removing Moldova and Switzerland from the market. The effect on the regions where the vines are grubbed up will be large, but the impact on the global market is likely to be quite small — reducing the global surplus, but not eliminating it. I don’t know if it will be enough.

Will it work? Much of the discussion that I have read focuses on the size of the vine-pull scheme — 400,000 acres versus the million acres that Marian Fischer Boel proposed two years ago. Although I think the size of the grubbing up program is important, I believe that the market-driven reforms and the elimination of distillation subsidies are more important. The 1988 vine-pull scheme took over a million acres out of production but, as we see today, didn’t eliminate the surplus because of the difficulty of selling the good wines and the incentives to keep make bad ones.

Economic Change and the Global Wine Glut

September 19, 2023 By Mike Veseth in economic crisis, wine, wine markets 5 Comments

Last week’s Wine Economist probed two influential theories of the emerging global wine surplus that are based in different ways on demographic trends. I call them the “Generation Gap” hypothesis and the “Life Cycle” hypothesis. This week I present a tentative sketch of an economic theory that might also help explain global wine consumption rises and falls. I am calling it the “Economic Transition” hypothesis for now, although I am not sure that’s the best description.

The Economic Transition hypothesis seeks to explain long-term trends in global wine consumption in terms of two interrelated forces: the changing economic function of wine and changing patterns of and expectations for economic growth.

Changing Economic Role of Wine

Wine is never just one thing, so it is not a surprise that its economic function may differ over time and space. If we zoom back 100 years and look at Old World countries, which are now and were then the largest wine consumers, the bulk of wine sold had a different purpose than most wines do today. Wine was a cheap source of calories for workers who could not afford a better diet.

Wine = cheap calories? There really isn’t a better explanation of the very high per capita levels of wine consumption reported by Kym Anderson and his colleagues in their Global Database of Wine Markets, 1885-2019 (Reference: Kym Anderson and Vicente Pinilla (with the assistance of A.J. Holmes), November 2017, revised and updated August 2021). France topped the table with average consumption of about 150 liters per capita, which is more than three times the per capita consumption today. Wine’s contribution to total caloric intake was very high and of course, the level of alcohol consumption associated with it was far from healthy.

The Economic Transition

While Old World per capita wine consumption has been falling for 100 years, the chart above shows that New World per capita consumption has risen. The U.S., while still modest by per capita standards, is now the world’s largest market for wine. What accounts for these differences?

In the Old World case, I would argue that as incomes grew, especially in the post-WWII era, workers and their families slowly and then suddenly became able to afford better diets, and the old role of wine as cheap calories became less and less important. Wine, for these consumers, was an “inferior good” where demand fell as income rose and better substitutes entered the choice space.

I am tempted to call this situation the “economic transition” in tribute to the economic theory of the “demographic transition.” The demographic transition theory posits that once income reaches a certain point, poor families switch survival strategies from having many children (to increase the odds that some will survive to support them in old age) to making greater investments in a smaller number of children. My Economic Transition idea is that when income reaches a certain point, cheap calorie wine is replaced by a better diet and a smaller quantity of better wine.

Wine as Aspirational Product

By the time we pick up New World wine consumers in the second graph above, the economic role of wine has changed again. It has become a discretionary purchase and, for many consumers, an aspirational item in so far as it represents an important component in an elevated lifestyle. Magazines such as Wine Spectator and Decanter appeared in the 1970s and soon began to grow in popularity by presenting wine at the center of a luxury lifestyle that includes food, travel, and celebrities.

The Global Financial Crisis may have magnified an already emerging split in the wine market by further increasing income inequality. The gap between those who merely aspire to a higher lifestyle and those who can actually afford to enjoy it increased. This trend helped fuel the premiumization of the wine market as luxury sales grew faster than aspirational demand, which of course still grew faster than the “normal good” demand for wine as a quotidian beverage.

The wine market could have chugged along quite well, I think, with premiumization driven by aspirational purchases and luxury consumption, but the global economy has shifted and its momentum is fading. Stagflation seems to have hit every part of the wine market quite hard. Low-income buyers are really feeling the inflation pinch. Those dollar stores that focus on sales to low- and moderate-income families find themselves under pressure to cut prices and cut costs. Shoplifting is up, we are told.

Aspirational products in general suffer when economic conditions and expectations force consumers to rein in their aspirations. That’s one problem that wine faces today.

Luxury buyers are still there, but here again, the momentum has shifted. Only the very top luxury brands are doing well as buyers — even relatively affluent ones — shift their purchases down a step (or two). Want proof? See what kinds of cars you find at your local Walmart superstore.

Aspirational buyers are the biggest problem. Their purchases are based on both their living standards now and the lifestyle they expect in the future. With the global economy stalling and pandemic-era aid balances evaporating here in the U.S., aspirational buyers confront a reality check. This factor, I suspect, is very important in the collapse of wine buying in China.

Implications?

So this theory argues that changes in the economic nature of wine consumption combined with changes in patterns of and expectations for economic growth can help explain many important trends in global wine consumption, including both recent premiumization patterns and the sudden decline in purchases by aspirational consumers.

This economic theory obviously isn’t the whole story when it comes to explaining the global wine glut, and it intersects with the generation gap theory in some respects since many younger people are the “aspirational consumers” who find that economic conditions have taken away some of their hoped-for prosperity. They’ve cut back aspirations for wine (and home ownership and paying off college debt and …) as inflation and slow growth put on the squeeze.

Is this the whole story? Of course not. But it is important to consider that the economic decision to purchase wine (or not) is affected by economic conditions. The best thing for wine, in this framework, would be a return to a more prosperous global economy and that is not something the wine industry can accomplish on its own. So the wine industry has an enormous stake in efforts to bring inflation under control and return key economies to a stable growth path.

In the meantime, I suspect we will see even more consolidation in the wine sector, with large players expanding and fine-tuning their portfolios to prepare for future growth while small producers (and most wineries in the U.S. are very small) seek out aspirational and luxury buyers in local markets.

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For a more thorough economic analysis of global wine trends I recommend a recent article by Rafael del Rey and Simone Loose. Here is the reference: del Rey, R., & Loose, S. (2023). State of the International Wine Market in 2022: New market trends for wines require new strategies. Wine Economics and Policy, 12(1), 3–18. https://doi.org/10.36253/wep-14758

Before you leave this page I’d like to draw your attention to one aspect of the two graphs above: global convergence. The top graph shows the trend of declining per capita consumption in traditional (a.k.a. “Old World”) wine countries (including Argentina and Chile) versus the rising per capita consumption in New World wine countries. Note that the two graphs have very different scales, however. Rising New World per capita consumption and falling Old World consumption seem to be converging (with Portugal and to a lesser extent France remaining outliers).

Theories of the Global Wine Glut

September 12, 2023 By Mike Veseth in economic crisis, Supply and Demand, wine markets 10 Comments

The world is awash with wine, or so it seems from reading the news. Down in Australia, they are counting up the gallons of unsold wine in a new (to me) measure: number of Olympic-size swimming pools full. Rabobank estimates that the surplus would fill 859 big pools or, if you want a more conventional measure, about 2.8 billion bottles. That’s a lot of surplus wine.

In France, the government has allocated two hundred million euro for crisis distillation. Surplus wine will be bought up to support local prices, and then distilled into industrial alcohol. The next time you use alcohol-based hand sanitizer at your favorite Paris restaurant it might be based on wines from Bordeaux or the Rhone.

Rioja is swimming in wine, too, and here in the United States, there are big stocks of bulk wine for sale in California and thousands of acres of surplus vineyards in Washington state.

This Time is Different

Surplus wine is not a new thing. Wine is an agricultural product and so it is prone to the famous “cobweb” market theory that predicts periodic booms and busts. Turrentine, the California wine and grape brokerage, has cleverly adapted this idea to the wine sector with their “Wine Business Wheel of Fortune.” But this kind of surplus is relatively short term and what we see in the market today looks more permanent.

Sometimes government policies create wine gluts. This is a big part of Australia’s problem today, of course, as Chinese foreign policy has essentially cut off Australian wine from its biggest export market for several years. And the European Union’s famous “Wine Lake” was filled up by price support policies that encouraged over-production to stabilize producer incomes.

If wine surplus is not unusual, what is different about this time? Surpluses today are global not just national. And the driving force is primarily insufficient demand, not excess supply. Something’s changed to create a new global wine environment. What happened? It is a complicated situation, but I’ll try to scratch the surface in a helpful way today and in next week’s Wine Economist.

The Global Wine Glut in Perspective

The graph above (taken from the most recent OIV global wine market report) shows the volume of global wine consumption since 2000. Wine consumption rose steadily for the 20 years that ended with the global financial crisis in about 2007. This was the golden age of wine with many producers (think Argentina and New Zealand) entering global markets with great success and worldwide wine consumption on the rise.

The pause during the financial crisis was thought at the time to be a temporary phenomenon, but in retrospect, we can see that it was the start of what I have called “wine’s lost decade” with stagnant wine sales. The years of steady growth were no more.

Wine consumption fell during the COVID-19 pandemic period, but we expected it to bounce back when the health crisis passed. It hasn’t and in fact, global consumption has fallen back recently to levels not seen since the early 2000s. The picture looks different if we measure the value of sales not the volume of purchases because of the premiumization trend. But people are drinking less wine and less wine than we are growing.

Is there a general theory to explain what happened to global wine? There are lots of special theories that, in an ad hoc sort of way, try to explain individual circumstances. I’ve identified three general theories that help me think about this situation. I’ll analyze two of them briefly below, saving the third for next week’s Wine Economist.

Theory 1: The Generation Gap Hypothesis

The Generation Gap Hypothesis is much discussed here in the United States. The Baby Boom generation powered that long rise in wine consumption, the theory holds, but the following generations failed, for one reason or another, to engage with wine with the same ardor as their parents and grandparents. Total demand cannot be sustained because younger drinkers have not increased consumption to replace the falling demand by boomers as they age.

The younger audience is just different, in this telling, and the task ahead is to introduce them to wine’s appeal through marketing or perhaps cultural education programs. In many wine countries, affiliates of an organization called Wine in Moderation are active to present the positive case for wine in opposition to prohibitionist forces.

It is difficult to organize a response to the Generation Gap problem because generic marketing programs are costly and not always effective (and wine producers and regions have strong incentives to invest in private promotion as opposed to generic programs).

The assumption that generations are fundamentally different leads to the uncomfortable question: Which generation is the anomaly? Are Boomers the norm and the problem is to get Millennials and others to get in line with them? Or, in fact, are Boomers a special case? Was that long wine boom the result of special circumstances? If so, how likely are those circumstances to reappear? Tough questions.

I think generational analysis is very useful in understanding the global wine glut, but it is important to be careful in drawing conclusions. I remember a university colleague of mine who cautioned his Asian Studies student to avoid popular “Asian Values” explanations of political and economic conditions in Japan, Korea, Singapore, etc. “Asian Values” can be twisted to explain anything that might happen, he told his students, so it isn’t valid on its own. Economic events ought to have economic explanations, too, and ditto political events. That’s how I see the Generation Gap hypothesis.

Theory 2: The Life Cycle Hypothesis

The Life Cycle Hypothesis presents a very different theory of the global wine glut. The hypothesis holds that generations are more alike than different in many ways. In particular, the demand for wine remains latent until consumers reach a certain stage in their lives. Millennials are just now approaching this stage and later generations are still in the queue. Wait for it, as Radar used to say on M*A*S*H, and they will discover wine.

This sounds like good news, but it really isn’t because post-Boomer generations are smaller and so, even if and when they find wine, there won’t be enough of them to replace Baby Boomer consumption levels. No use waiting for wine consumption to surge (and not much use in generic promotion, etc.). Supply adjustments are necessary and the sooner the better.

One question that the Life Cycle Hypothesis raises is why the big boom in wine sales only happened when the Baby Boomers came of age. Why didn’t previous generations get the wine bug before them? An answer is, of course, that Boomers represent a surge in the population curve, so anything they do has had a bigger effect, and the generations that immediately preceded them might have understandably had their normal cycle patterns interrupted by the Great Depression and World War II. So maybe the cycles will repeat as this hypothesis suggests, smaller than the Boomers but otherwise much the same.

An Economic Theory?

I find both hypotheses useful in understanding the global wine glut, but my Asian Studies colleague’s voice haunts me. I would be more satisfied if there were an economic theory to explain the economic fact of wine’s over-supply.

Come back next week for my attempt to provide an economic theory of the global wine glut.

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A book that I have found useful in thinking about generational analysis is The Generation Myth: Why when you’re born matters less than you think by King’s College London professor Bobby Duffy. Generations matter in Duffy’s analysis, but only when taken in context. Food for thought.

Wine and the Falling Dollar

August 29, 2023 By Mike Veseth in Economic impact, exchange rates, globalization, wine, wine markets Leave a comment

There are good reasons why it has been a while since I last wrote about wine and the dollar’s foreign exchange value. A lot of things have shaken up the pattern of wine sales here in the U.S. market, especially the channel-shifting that occurred during the covid pandemic and uneven return to what we laughingly call “normal.”

Many factors shaped the pattern of international wine imports and exports, too, especially supply chain bottlenecks that saw the cost of container shipments zoom up by a factor of ten (when you could find a container) and have now settled back down to roughly pre-pandemic levels.

Falling Dollar, Bouncing Dollar

The exchange rate has been a factor in the wine market through all of this, but it wasn’t really the important factor in most cases. The dust has settled enough now, however, that we need to think about the dollar’s value once again.

Although the situation can vary from currency to currency, the overall trend for the U.S. dollar in the last year has been down (see the graph above of the USD versus the EUR). The dollar fell sharply through the end of January and has bounced up and down a bit but has been in a downward trend since then.

A cheaper dollar makes imports more expensive since each greenback buys fewer units of foreign exchange. U.S. exports benefit because a cheaper USD means a lower cost to foreign buyers. It takes a while for the impact of an exchange rate change to be felt, but if the change is sustained, the impacts eventually come around.

Falling Dollar in Perspective

What should we make of the recent dollar decline? One good source of analysis is the Economist magazine’s “Big Mac Index” of currency values. The clever folks at the Economist have found that comparing the local currency costs of Big Mac sandwiches in different countries can provide insights into exchange rate conditions. Some currencies are “overvalued,” which means that they buy more Big Macs (and other stuff) abroad than they do at home. Market forces should push these currencies down in relative value over time.

That, more or less, is the story of the dollar in the last year. The dollar’s relatively high value encouraged some Americans to travel abroad and those who stayed home to buy lots of imports because the dollar’s strength made foreign things seem cheap. Inevitably, as they sold dollars and bought foreign currencies, the dollar fell in value relative to those currencies.

The dollar’s fall is a bit surprising because U.S. interest rates have been rising steadily this year and that usually creates an incentive for foreign investors to buy up dollars, offsetting the trade effects. But many other countries have boosted their interest rates, too, so the investment impact is less than you might expect. Perhaps the combination of the downward overall trend plus the periodic interest rate increases account for some of the trampoline bounce shown in the graph at the top of the page.

Where does the dollar stand today? As of August 3, when the Economist report went to press, the dollar was about four percent undervalued compared to the Euro, so it is not unreasonable to expect a bit of a bounce. It was seven percent undervalued relative to the Argentina peso, but I suppose that is using the semi-fictional official exchange rate. There is a special cheaper ARS rate for wine designed to encourage exports and of course, the black market rate is even lower.

Incredibly, the official ARS-USD exchange rate, which was approaching 300 pesos per dollar when the Economist report went to press, is now hovering around 350 peros per dollar after a sharp devaluation in response to destabilizing election results. (The exchange rate on the street is nearly twice as many pesos per dollar as the official number.) The graph below shows how quickly conditions have deteriorated for Argentina’s currency.

Over and Under

If the exchange rate isn’t a big factor in U.S. wine trade with Europe (but probably is a factor encouraging imports from Argentina because of the special exchange rate), then what about the rest of the world? The Economist study suggests that Southern Hemisphere wine producers have an exchange rate advantage when exporting to the U.S. market because their currencies are undervalued.

The New Zealand dollar, for example, is undervalued compared to the USD by 9.7 percent. This makes their popular wines even more competitive in the Sauvignon Blanc category, which is one of the few parts of the wine market that has experienced growth recently. The Australian dollar is undervalued by ten percent.

Undervaluation is the flip side of overvaluation. The currency is relatively cheap on the foreign exhange market, so foreign buyers get a good deal, but imported goods and services are more expensive. Both sides of the coin involve trade-offs. You get cheaper imkports if your currency is overvalued, but better export performance if it is undervalued.

Chile’s currency is undervalued by 16.7 percent in the Economist study, with the number for the South African rand an incredible 49.7 percent. Such large currency distortions are potentially very important in parts of the wine market where cost differences are critical.

Export Market Impacts

The analysis above has focused on how the exchange rate affects U.S. imports of wine, but it is important to note that American wine producers also compete with foreign producers (who also compete with each other) for exports to other countries, especially the Eurozone and Great Britain. The value of major southern hemisphere currencies is so low, if the Economist analysis is correct, that the dollar needs to fall a good deal more to make American wines competitive abroad. That’s not likely to happen.

What does the future hold? In the long run, over-valued currencies should fall in value and under-valued ones rise. But lots can happen long before the long run arrives, so don’t hold your breath. I will check in again on this topic when the next Economist report is released.

Too Much of a Good Thing: Washington’s Wine Woes in Perspective

August 22, 2023 By Mike Veseth in Economic impact, Washington wine, wine, wine markets 12 Comments

It has been a little more than a month since executives from Ste Michelle Wine Estates (SMWE) told their Washington winegrowers the bad news. Having already trimmed grape purchases over the past several years, they now planned to cut grape contracts by 40 percent over the next three years, starting with this fall’s harvest. SMWE is by far the largest wine producer in Washington and many of the vineyards that have come into production in the past ten years were planted with sales to “the Chateau” clearly in mind.

The announcement was big news. The wine press here in the U.S. and around the world has covered this situation very well. I am not a SMWE insider, so I don’t have breaking news to report here, but as someone who studies the U.S. and global wine markets (and as a personal consumer of Washington wine products), I want to contribute some perspective to the situation, which I hope Wine Economist readers will find useful.

Washington’s Problem By the Numbers

Washington has about 60,000 acres of producing vineyards today, a number that has grown rapidly in the last decade. SMWE is such a dominant producer in the state that their 40 percent cut in grape purchases will make about 10,000 vineyard acres redundant. Growers are advised to look at the situation strategically and to identify diseased and unproductive vineyards for vine removal. Demand and supply are out of balance. Thoughtfully reducing supply is a necessary short-term action.

This is not only sensible advice, it is also the advice that I hear nearly everywhere in the wine world these days. Jeff Bitter, the President of Allied Grape Growers in California, has been telling our State of the Industry audience at the Unified Wine & Grape Symposium this very thing for several years. It isn’t just that Washington has too many grapes, it is a California and global problem, too. I know of a few regions around the world where grapes are in short supply, but the list isn’t very long.

So the Washington situation isn’t unique, but its impact gets attention because of SMWE’s size relative to the Washington industry. Where other regions have suffered from grape cuts by dozens or even hundreds of smaller producers, the spotlight is focused clearly on Washington’s big producer. The big cut makes the news more clearly than many smaller cuts even if the net effect may be much the same.

That said, the proportion of vineyards that will be directly affected by cuts in Washington is higher than in California. This is partly the case because Washington was planting new vineyards while many growers in California were pulling them out. That explains a lot of the problem but not all of it.

The Curse of the Signature Wine

The success of Sauvignon Blanc from New Zealand and Malbec from Argentina has made many people believers in the “Signature Wine” phenomenon. You need to have one signature wine to define a wine-growing region, the story goes. I have always seen Signature Wine as both a blessing and a curse. It is a blessing because it makes a region easier to understand and to sell. But it is a curse because, in my experience, the monolithic identity makes it harder to sell other wines from the region. I have had some great Syrah and Riesling from New Zealand, for example, but these wines don’t get much love because everyone is thinking Sauvignon, Sauvignon, Sauvignon.

Ditto for Argentina, where the Syrah, Cabernet Franc, and Pinot Noir can be wonderful and the Semillion will surprise you. But the market chant is Malbec, Malbec, Malbec. Listen. You can hear it now! And that’s despite the fact that some winemakers think their Cabernet Sauvignon is a better wine.

Students of economics may recognize this as a sort of cockeyed variation on the foreign exchange theory of the “Dutch Disease,” where great success in one industry can backfire in terms of its negative impact on other industries.

I saw the Signature Wine blessing in person when we visited New York City a few years ago. A tour of notable wine shops found lots and lots of wines from Oregon and very few from Washington. Why? Customers who came looking for Oregon wines wanted one thing: Pinot Noir. So the shops made sure to have a large selection. But Washington wine isn’t dominated by one grape variety. There are lots of great wines, but no defining grape variety theme. And so no clear guidelines as to what consumers might expect.

Washington’s Signature Price Point

Actually, that last statement is not quite correct, and maybe this is the important point. Whereas Oregon is Pinot Noir (and Napa is Cabernet Sauvignon), Washington’s Signature Wine isn’t defined by a grape variety so much as a price point. I don’t think it was intentional. Washington has always made lots of different wines from lots of different grape varieties at lots of different price points. But SMWE, the state’s dominant producer, and some other volume producers, too, eventually discovered success by producing large quantities of wines in the $9 to $11 price range at a time when that was the sweet spot of the market. Bulls-eye!

SMWE has many wine brands from Washington state, how did it (and the state) end up being stereotyped to one spot on the wine wall? It is too big a question to be analyzed here. I admit that as a consumer, I sometimes struggled to figure out the relationship between big-volume brands like Chateau Ste. Michelle, Columbia Crest, and 14 Hands. It seems like the power of market growth in that critical price range was like the firm pull of gravity. Hard to resist. But I am sure there was more to it than that.

As premiumization has driven the market sweet spot higher, SMWE’s advantage has melted away enough to create a crisis. That signature price point is still important, but it can’t absorb all the grapes that were planted in anticipation of its continued growth.

Realignment is necessary, but it won’t be as simple as raising price or creating new brands (or designing new labels as I have seen on store shelves). That signature thing will be harder to reset because it is easy to change how you represent your brand, but hard to control how others will perceive it (a variation on a Machiavelli lesson).

Washington is now in a new era, where identity will come from the bottom up through the work of the many successful small- and medium-sized wine producers. It is a big challenge, but the quality is there and so is the determination.

A California Thought Experiment

Here is a little thought experiment that might put the Washington situation in context. What would it mean if California’s largest wine business, Gallo, were to cut grape purchases by 40 percent the way the SMWE did in Washington? I put this question to Natalie Collins, President of the California Association of Wine Grape Growers, and Jeff Bitter, President of Allied Grape Growers. Here is my analysis (all errors are mine, not theirs) based on our conversations.

Gallo buys about one-quarter of California’s wine grapes (a much smaller proportion than SMWE in Washington, although that could be where things end up). That would amount to about 1 million tons of wine grapes in a fairly typical 4 million ton year. A 40 percent cut would mean 400,000 fewer tons of grapes and so, figuring maybe 12 tons per acre, that’s more or less 35 thousand acres of surplus vineyards. If all those vineyards stayed in production, that would be a huge surplus of grapes that would drag down grape prices in some market segments.

The hypothetical Gallo cuts wouldn’t impact all parts of the wine grape market equally, of course. Given recent market trends you might expect vineyards in the interior to be disproportionately affected, although high-quality grapes might find a home in some California blends, replacing more expensive grapes from other regions as the cost squeeze continues to bite.

Bottom line for this thought experiment: a 40 percent cut by the state’s biggest wine grape buyer would have a greater absolute impact in California, as you would expect, but SMWE’s cuts are a larger relative problem in Washington

Something to Think About

Do I expect Gallo to cut grape purchases by 40 percent? No. This is just a hypothetical exercise to stimulate thought.

But Gallo’s huge portfolio is subject to the same general market forces as other producers, so some quantity adjustments are necessary. And Gallo might even become a seller of wine grapes in some market segments if they can’t find a use for all the grapes on the 20,000 acres of vineyards that they control.

Gallo selling grapes? Now that’s really something to think about.

Wine and the Curse of the Inverted Yield Curve

August 8, 2023 By Mike Veseth in economic crisis, Economic impact, wine, wine markets 3 Comments

These are uncertain times for the global and U.S. economies and for the wine industry’s economy, too. The International Monetary Fund recently released its World Economic Outlook mid-year update and the story it tells can be as optimistic or pessimistic as you want it to be.

Landings: Soft, Hard, Trampoline

The “glass half full” story is that, for the world economy as a whole, inflation seems to be slowing and global growth is slowing, too. But nothing is crashing … yet. That makes the possibility of a “soft landing” scenario seem more likely than it did just a few months ago. Maybe the slowing economies will moderate rising prices without the need for a sharp, job-destroying recession. And perhaps key central banks will be able to halt interest rate increases before they go too far.

A “soft landing” is far from certain, but it might be possible. That’s good news for a dismal scientist like me because one alternative is the “hard landing” scenario, where jobless numbers zoom to bring inflation down (or the “trampoline landing” possibility, where anti-inflation nerves fail and prices jump pop back up again).

Down the Up Yield Curve

These same issues apply here in the United States, where economic growth seems to be holding up better than in some other regions. But concern is especially heightened by a phenomenon called the “inverted yield curve.” A yield curve plots government bond yields from short-term (30 days) to long-term (30 years). The curve normally slopes upwards as in the chart above from 2021, which makes sense since long-term investors should receive higher returns for taking on the risk associated with longer-maturity assets. You can better guess what economic conditions will be like in 30 days than in 30 years, so the 30-year return should be higher.

A lot of attention is paid to the yield curve among investors. The New York Times and the Wall Street Journal publish yield curve charts daily. And Japan’s central bank actually makes yield curve management one of its policy targets.

In this context, an inverted yield curve, where bond yields are lower for longer-term assets as in the recent chart above, is a puzzle and an alarm. It is a puzzle because it is not clear why investors would be willing to lend longer-term for less. Do they think that inflation, which is relatively high today, is likely to be much lower in the future and so the inflation premium necessary to compensate for price hikes would be lower than today?

What? Me Worry?

Or is it because they expect today’s high-interest rates to push the economy into a recession? Falling incomes tend to drive interest rates down because loan demand is less. And a deepening recession would likely force the Federal Reserve to push interest rates back down. Down to the level, the yield curve seems to predict? That’s something to worry about.

And investors are worried because the inverted yield curve has a very strong record of predicting recessions. The economy doesn’t tank immediately, but eventually. Growth turns negative a year or so after the curve inverts and recession alarms go off.

This Time is Different?

So it has been about a year since the yield curve turned topsy-turvy and it is no wonder that investors are getting nervous. Will the curse of the inverted yield curve take hold later this year or perhaps in the first quarter of 2024? Some so believe in the yield curve’s track record that they are positive that bad news is in the offing.

It is dangerous to argue “this time is different” in the face of a theory that has both logic and history on its side, but maybe this time is really different, and that soft landing will happen. After all, how many times in the past have the conditions that led up to the yield curve flip included a global pandemic, supply chain breakdown, massive fiscal stimulus, and a very hot shooting war involving major powers?

So maybe the curse of the inverted yield curve won’t strike the U.S. economy in the near future. A recession is bound to happen eventually and some people will look back at today’s yield curve situation and see cause and effect, but there are just enough wild card shocks to the system in the past few years to make it plausible that the U.S. economy might “stick” its soft landing after all.

This Wine is Different?

That said, it makes sense to consider how a recession might impact the wine sector. After all, even if the U.S. economy avoids a recession, many of the other major global economic engines including Great Britain, the E.U., Japan, and China look vulnerable today.

If we exclude the short, sharp shock of the covid pandemic period, the last sustained recession was about 15 years ago during the global financial crisis. The weak economy affected the wine industry in many ways, but trading down (to lower prices) and trading over (to more casual wine brands) were part of the story. Would that happen again if a recession showed up now?

Yes, I suppose so, at least to a certain extent. But the wine market has changed in many ways since the last big slump. For example, U.S. wine sales growth was still pretty strong going into that crisis, whereas the market is already slack today and a recession could be more damaging.

Luxury Market Woes?

The trend towards premiumization has strengthened, too, which could affect trading down and trading over. The heart of the market has moved to higher price points that may well display different characteristics than before. And of course, wine sales seem even more dependent on a relatively small segment of the total market, so their particular reactions are very important.

The fact that growth in wine sales has become increasingly concentrated in the luxury part of the spectrum is troubling right now. Sales of luxury goods in general surged during the covid pandemic. Cash from government stimullus payments plus the money that wasn’t being spent on services financed a luxury spending spree. Recent financial reports suggest that tighter consumer budgets have brought a lot of this spending to a halt except at the very high end (think Birkin bags). Even Champagne is feeling the squeeze, I’m told.

The wine economy is experiencing lots of stress and uncertainty these days. It would be great if the inverted yield curve turned out to be a false alarm this time. Fingers crossed!

America’s Wine Regions: Surprising Michigan

August 1, 2023 By Mike Veseth in emerging wine regions, wine, wine history, wine markets 3 Comments

Sue and I have spent the last two weeks tasting wines from two Michigan wineries, Good Harbor Vineyards and Aurora Cellars (both part of the Simpson Family Estates group). The wineries are located on the Leelanau Peninsula, a short drive from scenic Traverse City.

Michigan wines? Are you surprised? We discovered Michigan wine several years ago at an industry event called Riesling Rendezvous, organized by Ste Michelle Wines Estates, which was a regular stop on top world Riesling producer itineraries in the days before the covid pandemic.

The Riesling Belt

Riesling Rendezvous brought together the makers and their wines from all around the world and it helped teach us that here in North America, there is a northern Riesling belt that runs from Washington state (the Columbia Valley) and British Columbia (Okanagan Valley) to Idaho (Snake River Valley), Michigan (Great Lakes), Canada’s Niagara Peninsula, and on to New York (Finger Lakes). Great Riesling wines can be found all along this northern belt, so it makes sense that great wines of other types are found there, too.

Michigan wineries always came to Riesling Rendezvous and turned skeptics into fans. Respect! Not everyone has the benefit of the Riesling Rendezvous experience, however, so the very fact of Michigan wine often comes as a surprise.

The idea that American wine comes from California is very strong and there is some logic in it. California’s nearly 5000 wineries produce about 90% of all U.S. wine. California is big in wine; there are lots of vineyards acres, wine producers, and some of the largest winery complexes in the world.

Michigan’s Surprising Wine Industry

Most of the over 6000 U.S. wineries not located in California are small producers that depend on loyal local consumers. The difference in scale means that they are often overlooked and many people, even some locals, are surprised to discover them.

That’s true with Michigan’s wine industry. According to American Wine by Jancis Robinson and Linda Murphy, Michigan’s wine history goes back to the 1600s. French explorers made wine from native grape varieties, and the settlements that followed made wine, too. Eventually, the Michigan wine industry emerged and gained steam in the mid-1800s.

Michigan wine recovered quickly from Prohibition, according to American Wine, but then pretty much collapsed. Why? Competition is the answer. Many early wines were made from Concord grapes, so winemakers had to compete with grape juice companies for grape supplies. Investment in vineyards was limited by the higher returns offered by conversion to apples and cherries. Only two wineries remained in 1970. The long book of Michigan wine history was seemingly writing its last chapter.

But the book goes on. Michigan boasts 233 wineries in 2023 according to the Wine Business Monthly, having experienced steady growth over the last ten years. Michigan ranks #9 among U.S. states in terms of winery count, wedged between North Carolina (205 wineries) and Ohio (329 wineries). Surprised by these numbers? I thought you would be!

Simpson Family Estates

The wines we sampled from Good Harbor Vineyards and Aurora Cellars have roots that go back more than 40 years, which is a very long time in American wine. Founder Bruce Simpson aspired to make good, affordable wines in Michigan and, after studies at UC Davis, he and his wife Debbie established Good Harbor Vineyards in 1980. The operation remains in family hands today and has grown into Simpson Family Estates, which includes both Good Harbor and the Aurora Cellars wines. Harbor Hill Fruit Farms, which supplies grapes and winemaking services to the family wineries and other winemakers, too, is also family-owned and -operated.

Given our previous experience with Michigan wines, we weren’t surprised that the Dry Riesling and Gruner Veltliner wines we tasted were very good. But the quality of the sparkling wines and the Pinot Grigio caught us a bit off guard, as did the Kiwi-esque punch of the Sauvignon Blanc.

The red wines from Aurora were the real surprise. The Cabernet Franc was terrific and the Blaufrankisch was excellent, with a bit more soft grip than the Cabernet Franc and good fruit flavor, too.

Blaufrankisch (a.k.a. Lemberger) is an under-appreciated grape variety and we are glad to see it getting attention in Michigan. The grape was planted here in Washington state in the early days but is slowly disappearing as vineyards are replanted to more profitable Cabernet Sauvignon. Lemberger sells out at the tasting room, one winemaker told me, but it is hard to sell through distribution.

We were surprised to see Blaufrankisch in Michigan. But then Michigan wine is full of surprises, isn’t it?

Italian Wine and the Paradox of Scale: Three Case Studies

July 11, 2023 By Mike Veseth in cooperatives, Italian wine, wine, wine markets Leave a comment

Most of the world’s wine is produced by a relatively small number of very large wineries. But most wineries are very small. So wine is both big and small at once. That’s wine’s paradox of scale.

You can see the paradox at work here in the United States. According to the annual Review of the Industry issue of Wine Business Monthly (February 2023), there were 11,691 wineries in the U.S. Eighty-three percent of the wineries, however, produced fewer than 5000 cases of wine in 2022 and 49% produced 1000 cases or less.

Most of America’s wine was made by the less than half of one percent of makers in WBM’s “Top 50” list of wineries that produce at least about 300,000 cases a year. Gallo tops the list with an estimated 100 million cases, about as much as the next four producers combined (The Wine Group, Trinchero Family Estates, Delicato Family Wines, and Constellations Brands).

The situation isn’t exactly the same in other wine-producing countries but the paradox of scale still generally exists. How can small wineries compete in markets dominated by big ones? There’s no single answer to this question, so Sue and I are always very interested when visiting small wineries that seem to thrive alongside much larger and better-financed competitors. Herewith are three case studies from our recent tour of the Lugana DOC and Garda DOC regions of Northern Italy.

Location, Location, Location

Sirmione is a pretty special place, no matter how you look at it. The people are special, or at least the ones we met are. Maria Callas, the famous opera star, was born here 100 years ago. The land is special, too, flat as a pancake right on the edge of Lake Garda, with a small peninsula jutting out into it. The land, with its thick clay soil, and the lake effects mean that the wines are special. Distinctive and intense.

Four generations of the Zordan family have been farming grapes here since 1924, so their roots in this particular location run very deep. As the region has developed, however, the challenges they’ve faced go beyond the usual list of natural and market woes. The land here is terrific for wine growing, but it is also in demand for hospitality and tourism. It is a beautiful location if you are staying in the Garda region. So it was, in fact, a little bit surprising when we came upon the four-hectare vineyard and winery as we navigated through the otherwise fairly built-up streets that surround them.

The family business, Cascina Maddalena, has evolved over the years. The basic business before 1999 was selling bulk wine and that is still a source of revenue today. But it became clear that the family needed to capture more of the value added if it was to sustain the vineyards and the business through more generations. So a few hectares of the land were sold off to pay for a small but useful winery, producing about 35,000 bottles per year, and an attractive agritourism center for tastings, group events, and direct sales. “Cascina” is Italian for “farmhouse” and that’s the warm feeling you get here.

Farming grapes and making wine is hard work. Running an agritourism business is hard work, too, and the whole family pitches in to make it successful and to make the family business sustainable.

Is all the hard work worth it? From our perspective, the answer is a clear yes. The Cascina Maddalena Lugana DOC wines we tasted over lunch were stunning, displaying an intense and memorable minerality. I was especially impressed by the wines they call “Clay,” which are only produced in special vintages (we sampled 2020 and 2018). The wines spend a year on their lees in stainless steel tanks and another year in the bottle before release. Incredible.

Location in terms of both the vineyards and the winery and its hospitality facilities is key to Cascina Maddalena’s success and it is one successful strategy for smaller wineries to consider.

Sharecropper Roots

Cantina Gozzi shares some interesting similarities to Cascina Maddalena along with clear differences from it. Gozzi is also a multigenerational family winery that was founded about 100 years ago. The family were sharecroppers, working the owner’s land in return for half of the crop. This is not exactly the easy road to fortune, but it was a common practice in Northern Italy for a long time.

Somehow the Gozzi family managed to find a way to buy the land to farm for themselves as a mixed agricultural enterprise of cattle and cereals along with wine grapes. The farm is several kilometers from Lake Garda in the rolling hills closer to Mantova. The soil is different here with clay in the lower spots and more stoney and calcareous near the hilltops, the result of ancient glacial action.

It wasn’t until 1985 that the family decided to make wine the main focus, which required new investments in both vineyards and cellar facilities. Given the farm’s history, it must have been a difficult decision to give up the security of diversified production and put all the family’s eggs (I mean grapes) in one basket. But they have made it work through the sort of energy and focus that must have been necessary to buy the land in the first place. Total production is about 120,000 bottles per year.

Gozzi is in the Garda DOC zone, which means that both native and select international grape varieties are permitted. Our tasting, therefore, featured a pair of Garda DOC Chardonnay wines, one fresh and floral after a time in stainless steel tanks and the other, the Garda DOC Riserva Colombara, a richer style from a single vineyard with a year in French oak. There is also a Frizzante Chardonnay that we enjoyed at lunch at Trattoria La Pesa in Castellaro Lagusello which specializes in local cuisine (you should try the stewed donkey with polenta).

Hard work, clear focus, and a generational perspective. These are some of the qualities that impressed us at Cantina Gozzi and I even think you can taste them in the wines if you close your eyes and open your imagination.

Strength in Numbers

Cantina Colli Morenici is a cooperative winery, a type of business organization that we don’t often think about here in the United States. But cooperatives are enormously important in global wine markets, especially in Northern Italy. You may not think about cooperatives when pouring a glass of wine, but you should. You may have poured yourself a glass of wine made here, for example, although chances are that there was a different name on the front label.

Cooperatives tend to be formed in times of crisis, when winegrowers and small producers band together as a protective measure, seeking strength in numbers in the face of unfavorable market conditions. Such conditions existed in Italy in the 1950s and Cantina Colli Morenici was born in 1959.

The “strength in numbers” strategy continues to drive Italian wine to a certain extent and in 2021 Cantine di Verona was formed through a merger of Cantina Collie Morenici and two other cooperatives: Cantina Valpantena and Cantina di Custoza. Together they have three wineries providing both scale (1800 hectares of vineyards) and scope of production (a wide range of wines and styles) for their 500+ members.

The wines are meant for everyday consumption, not cellaring and investment. The wines we tasted were good and good value. The most memorable was a limited-production Amarone from Cantina Valpantena that sold for €49 at the winery. The shop at the winery sold bottles, bag-in-box, and pumped directly into your container using a machine that looked like it would be at home in a gas station: €1.35 per liter, rosato or bianco. Yes, the wine was cheaper than gasoline.

We were told about 70 percent of production is exported, with most of the wine bound for the U.S. market destined for private label brands. That made sense to me when I tasted one particular wine and had an “ah-ha” moment. I know that wine, I thought. I’ve bought it at Trader Joe’s (or something very much like it, I’m sure) under a different label.

The future? Custoza Superiore DOC is underappreciated in the U.S. market and the winery sees potential to develop the market for this wine. Custoza is the wine region between Lake Garda and Verona and its signature wine is a blend of native varieties. A lot of potential there, I think.

Strength in numbers gives the wineries of Cantine di Verona the volume they need to support export investments and the resources to market their wines at home. We were pleasantly surprised to see an advertisement for Cantine di Verona when we were watching a bit of television at our hotel in Verona during a thundershower. It was during a Food Network Italy show featuring Italian nuns cooking traditional dishes. Cooking nuns? I’ll drink to that!

The Hedgehog & the Fox: Discovering the Wines of Lugana DOC & Garda DOC

June 27, 2023 By Mike Veseth in Italian wine, wine, wine markets, wine tourism Leave a comment

Today’s Wine Economist is inspired by Isaiah Berlin’s famous essay “The Hedgehog and the Fox.” The fox knows many things, Berlin wrote, drawing on an ancient Greek parable, but the hedgehog knows one big thing.

People are like that, don’t you think? And there are wine regions like that too. The Lugana DOC on the shores of Lake Garda in Italy, for example, reminds me of the hedgehog, with its clear focus on one important wine. The Garda DOC, on the other hand, is home to many different ideas of wine. It is the fox.

Please read our report below and see if you agree — and which wine critter you find more appealing.

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Lake Garda in the Italian north is one of Europe’s great summer playgrounds. No wonder visitors flock there from all over Italy and from Germany and Switzerland too. There is something for everyone. The lake itself for watersports, of course, along with beaches and campgrounds, theme parks, and more. The local economy benefits from the region’s understandable popularity and so does the local wine industry. I’ll bet both were hit hard when covid restrictions put a lid on tourism. They seem to be booming now.

The Lake Effect is Strong

Wine, not theme parks, was the focus when Sue and I joined a group of journalists from Germany and Denmark for a tour co-hosted by the Lugana DOC and Garda DOC consortia. The fact that the program embraced two overlapping but very different wine regions made this an unusual adventure.

Burton Anderson acknowledged the impact of Garda tourism on the Lugana wine industry in his classic 1990 guide The Wine Atlas of Italy,

Its success has been attributed to the fact that it is white and comes from the well-frequented Garda resort of Sirmione, but the real point in its favor is its graceful personality that appeals to both novices and to people who take wine seriously.

The wines are shaped by the combination of the Turbiana grape variety, also known as Trebbiano di Lugana, plus the beneficial lake effects, and the subtle variations in vineyard geology that result from glacial activity that made this region fairly flat but far from homogeneous. The Lugana DOC wines, as I wrote a few weeks ago, balance salinity against minerality in ways that please and provoke further investigation.

A Visit to Cantina Ottella

Although restricted to just one grape variety, we found tremendous variety in the Lugana DOC wines. A memorable visit to Cantina Ottella opened our eyes to the possibilities. Ottella is a project of the Montresor family, who have been making wine here for four generations. Michele Montresor showed us the winery with its fantastic modern art collection and then we began with the wines. Picked early, the Turbiana grape variety makes sparkling wines that are justifiably popular. Picked a little later, in September, the Lugana DOC wine showed the salinity and minerality that defines it so clearly.

The next wine caught our attention. Le Creete is harvested later, in October, from old vines from a single vineyard. It was complex and even more interesting than the wine before. The Riserva was elegant, with well-integrated oak. An amphora wine dedicated to Michele’s father Ludovico came next. Stunning in its complexity. Then, finally, a Lugana DOC from the 2007 vintage, to show that Lugana can age elegantly and develop gracefully. Quite an experience. And proof, if we needed it, that Anderson was right when he said that these Lugana wines have what it takes to interest experienced wine enthusiasts even as they delight beginners.

Foxy, but in a Good Way

Cantina Ottella is famous for its Lugana wines, but they also produce wines with grapes from their vineyards in other local appellations. The evening before our visit, for example, we ordered one of their Garda DOC red wines called Campo Sireso with dinner. It was a blend of Corvina Veronese, Merlot, and Cabernet Sauvignon from the Garda wine zone. The wine was fantastic and caught our attention.

The “fox” Garda wine zone is very different from Lugana’s “hedgehog.” Approved grape varieties for Garda include both native grapes (Cortese, Trebbiano, and Garganega whites and Corvina and Marzemino reds, for example) and international varieties, too (Chardonnay and Sauvignon Blanc whites and Cabernet and Merlot among others on the red side).

This means, of course, that Garda has something for everyone who comes to visit Lake Garda in the summer months and the existence of red wines is perhaps especially appealing to visitors from Northern Europe who might have a particular preference for red wines.

But Garda’s fox-like character also means that it has more trouble defining its identity in export markets, which is a shame since the wines can be very good indeed.

Sue and I were fortunate to be able to visit several wine producers who have adopted different market strategies. Come back in two weeks for these “hedgehog” and “fox” case studies. In the meantime, next week’s Wine Economist will feature a special “Independence Day” flashback column.

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Many thanks to the Lugana DOC and Garda DOC consortia for hosting us for this visit. Thanks, as well, to the wineries on our brief tour who generously gave us their time, knowledge, and very good wines! The winery list includes La Moretti, Ottella, Azienda Zenato, Cascina Maddalena, Ca” Maiol, Borgo la Cuccio, Colli Morenici, Bulgarini, and Perla del Garda. If you see wines from any of these producers on a shop shelf or wine list, please give them a try. You won’t regret it.

Pogo’s Dilemma and the Future of Prosecco Superiore

June 13, 2023 By Mike Veseth in Italian wine, wine, wine markets 2 Comments

Pogo’s Dilemma is the theme of this week’s Wine Economist. Pogo’s Dilemma? It is a reference to Walt Kelly’s famous cartoon where the character Pogo reflects, “We have met the enemy and he is us.” Sometimes life is like that, or at least it seems that way to me for the successful winegrowers in the Prosecco Superiore region.

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As last week’s Wine Economist explained, the Conegliano Valdobbiadene Prosecco Superiore DOCG region in north-east Italy is a remarkable success story. The historic home of Prosecco in Italy (and the source of some of the finest wines today), Prosecco Superiore DOCG is in an enviable situation. Nearly every hectare of available vineyard land is planted, yields are pretty much at the maximum, and the wines sell out at attractive prices. There are not many wine regions that can compare.

By the Numbers

Here is the story by the numbers. Prosecco Superiore DOCG had 8,683 bearing hectares of grape vines in 2022, which produced a total of about 103 million bottles of wine and €634 million in revenue for the 2127 producers and growers (including seven cooperatives).

Italy is the top market for Prosecco Superiore DOCG wines, accounting for about 60 percent of sales. The top five export markets are the UK, Germany, Switzerland, Austria, and the United States (Canada is next at #6).

You might be surprised to see the U.S. below Switzerland and Austria on this list. The U.S. sometimes seems to be awash with Prosecco. You see it everywhere on store shelves and restaurant lists. Surely the U.S. drinks more Prosecco than the export numbers suggest?

Prosecco vs Prosecco

Well, yes, Americans are great fans of Prosecco, but only about 3 million bottles of it are Prosecco Superiore DOCG from the Conegliano Valdobbiadene region. The rest is from the much larger Prosecco DOC zone or, like the big-selling Kirkland Signature Prosecco, from the Asolo Prosecco region. These wines can be very good and are generally less expensive. They pretty much dominate the U.S. market with many of the top-selling brands either distributed by U.S. wine companies (think Gallo’s La Marca brand) or sold under their labels. There is a Cupcake Prosecco, for example, a Barefoot Bubbly Prosecco, and now even a Prosecco from NBA star James Harden.

Prosecco DOC is ubiquitous in the U.S. market, but Prosecco Superiore DOCG can be hard to find. You really have to look for it. But the effort is worthwhile. I have organized comparative tastings of different Prosecco wines a couple of times and the Prosecco Superiore DOCG wines always make people smile and ask for more.

Prosecco DOC and DOCG wines are made with the same grape variety, Glera, using the same production techniques. The DOCG zone’s terroirs account for the wine’s distinctive qualities. It maybe isn’t a surprise that consumers who understand the difference between the wines are following the premiumization path toward Prosecco Superiore DOCG. Interestingly, producers told me, as Prosecco Superiore markets mature consumers tend to shift from the Extra Dry style that is so popular with Prosecco DOC wines to Brut and even Extra Brut Prosecco Superiore.

A Good Life (and its Discontents)

Life is good in the Conegliano Valdobbiadene region, but that doesn’t mean there aren’t plans to move ahead. The goal is not so much to sell more wine (yields are maxed out) but to increase margins on the wine and generate new revenue sources through expanded wine tourism offerings. Wine tourism suffers a bit today from limited infrastructure and the nearby presence of Venice. Venice doesn’t give up her tourists once they arrive at the lagoon (day-tripping to the wine country doesn’t really happen), which makes an emphasis on destination wine tourist facilities critical.

Raising margins means raising prices and this is never easy, even for a wine like Prosecco Superiore, which seems undervalued for the quality it delivers. One part of the problem is competition, which tends to discourage price increases. The Prosecco Superiore producers compete with each other in every market, of course, and compete with other Italian sparkling wine producers for the key domestic market. Here in the U.S., sparkling wines from around the world compete with each other for room on wine shelves and space on restaurant wine lists.

The biggest competition for Prosecco Superiore wines here in America and perhaps in other export markets, too, are the generally less expensive Prosecco DOC wines. These wines are popular, heavily promoted by importers, and have consumer-pleasing quality. Prosecco Superiore’s efforts to increase price are limited, in other words, by the good value that Prosecco wines represent. And, of course, most U.S. consumers don’t really get the DOC vs DOCG thing. Prosecco is Prosecco to them.

When is Prosecco Not Prosecco?

This is where Pogo’s Dilemma (we have met the enemy and he is us) comes in. Many producers of Prosecco Superiore DOCG wines are also producers of Prosecco DOC wines (made with grapes from the DOC zone, not the DOCG zone). So, in effect, they are their own biggest competition when it comes to price increases. The better the DOC wines, the harder it is to boost DOCG prices.

The Moretti Polegato family, for example, owns Villa Sandi, a top Prosecco Superiore DOCG producer. Their wine was featured on the by-the-glass list at a top Verona restaurant we visited. But the family also owns La Gioiosa, whose DOC wines are often found on supermarket shelves. The family strategy seems to be to continue to raise the quality of all the wines rather than thinking about one versus the other and seize other opportunities that make sense, too.

For example, you can enjoy a glass of Prosecco at the Villa Sandi wine bar at the Venice airport, or have an excellent meal and perhaps spend the night at Locanda Sandi in Valdobbiadene. The Pogo effect isn’t really a problem in this case.

Smaller producers and those who focus exclusively on DOCG wines must consider different strategies. the family-run Vincenzo Toffoli, for example, produces 250,000 bottles including both Prosecco DOCG and DOC wines from their 20 hectares of vines. Although 95 percent of the wine is sparkling, the family is also exploring the region’s still wine heritage, including sweet passito wines, a delicious dry passito red Colli di Conegliano Refrontolo DOCG, and a ripasso Marzemino Veneto IGT.

The wines of Col Vetoraz are as spectacular as the tasting room view of the steep Valdobbiadene vineyards. Great wine, just don’t call it Prosecco. Prosecco, according to Col Vetoraz and several other producers, has degenerated into a generic term, defined by the big producers on the plains, which doesn’t capture the special quality of their wines. So they’ve banished Prosecco from their labels and literature. The wines they make are Valdobbiadene DOCG. Simple as that.

Refusing the Prosecco name seemed crazy to me at first, but maybe it is a reasonable response to the Pogo effect. If Prosecco is often sweetish and cheap, then maybe a drier luxury wine should have a different name, even if it is one that Americans might be afraid to pronounce. It certainly might work for some producers in their domestic market. Or at least that’s what came to mind when we were shopping for Prosecco Superiore DOCG wines at a big shop in Verona. You can see how the wine display was labeled in the photo.

Sue and I were impressed with the creativity and innovation we encountered during our visit to Conegliano Valdobbiadene Prosecco Superiore DOCG. It is a magical wine from a magical place and the magical people who make it are bound to find solutions to Pogo’s Dilemma.