Three Faces of Wine Strategy: Porto Perspectives

If you walk along the river in Vila Nova de Gaia, just across the Douro from beautiful Porto, you are in the right place to visit the famous Port lodges and sample different types and styles of Port wine. If you dig a little deeper, you can also learn something about the diversity of successful wine industry strategies that these historic firms have deployed.

I’m interested in Portuguese wine because it has experienced rising sales here in the US market while some other countries have struggled and lost market share. And I am interested in wine industry strategies because, as I wrote here last week, the global wine market seems to have plateaued and so everyone wants to know the secret to growth in a stagnant market.

Herewith, for your consideration, three case studies inspired by an imaginary Vila Nova de Gaia excursion.

Taylor’s: Tradition and Innovation

Our first stop is Taylor’s, one of the most famous names in Port wine. Fortified wines, including Port wines, are not the easiest products to sell these days, but Taylor Fladgate, which has been in this business since 1692, is committed to Port and Porto. The Fladgate Partnership’s portfolio of Port brads is broad and deep, including Taylor’s, Fonseca, Croft, and Krohn.  No unfortified wines are produced. This focus on its traditional business, however, doesn’t rule out innovation and entrepreneurial endeavors.

Late Bottled Vintage (LBV) Port was a Taylor innovation, for example. I have argued that LBV Port helped rescue and revive the Port trade in the 1970s by giving consumers the experience of Vintage Port without the expense and bother. Taylor’s innovation continues today with its canned White Port spritz, Chip Dry & Tonic, a delicious and refreshing addition to the RTD market that may help consumers see Port wine in a new light.

Taylor’s commitment to Port and Porto is also expressed through its investment in the region’s wine tourism industry. First came the fantastic Yeatman Hotel high on the hill overlooking the Douro next door to the Taylor’s Port lodge. The hospitality investment continued with the redevelopment of luxury Hotel Infante Sagres in central Porto and the Vintage House Hotel in the Douro Valley at Pinhão.

That’s really himpressive … but wait, there is more! The the area of warehouses reaching down to the Douro from Taylor’s were developed into Porto’s new wine tourism destination — the incredibly ambitious World of Wine. Sue and I haven’t visited WoW yet, but we look forward to exploring its many varied experiences when we get back on the road again.

Bravo to Adrian Bridge and The Fladgate Partnership for their bold strategy of doubling down on Porto and Port wine.

Symington: Porto and the Douro

If you continue down the pathway along the Douro and up the hillside a few blocks you will come to Graham’s, part of the Symington Family Estates, with its historic Port lodge and destination restaurant, Vinum.

Symington represents a second face of wine industry strategy here in Porto. They are all-in on Port wine, of course, with four famous brands: Graham’s,  Dow’s, Warre’s, and Cockburn’s. But Symington’s reach extends beyond Port to Portuguese table wines including Quinta do Vesuvio, Quinta do Ataíde, Quinta da Fonte Souto, Altano, and Prats + Symington, a partnership with Bordeaux’s Bruno Prats. All the wines but one come from the Douro Valley. Quinta da Fonte Souto is in Alto Alentejo, which is Symington’s first foray outside of its home region.

Sue and I recently enjoyed a bottle of P+S Prazo de Roriz, a red wine made from younger Douro Valley vines that harmoniously balances fruit and minerality — a seriously attractive wine that punches above its  $20 price point.

Although the Fladgate Partnership and Symington Family Estates have taken different pathways in wine industry strategy, they share a strong commitment to sustainability. Adrian Bridge is a driving force for climate change action in the wine industry and beyond, for example, and Symington is one of the wine world’s most recognized Certified B Corporations.

Sogrape: Portugal Goes Global

As you walked from Taylor’s to Graham’s along the Douro you passed two noteworthy Port lodges that are part of the Sogrape family, Sandeman’s and Porto Ferreira (Offley Port is also a Sogrape brand). Sogrape, Portugal’s largest wine producer, is an important force in Port wines and in wine generally. It is the producer, for example, of Mateus Rosé, which was once the best-selling imported wine in the US market and remains incredibly popular around the world.

Sogrape’s strategy extends across Portugal’s wine regions from the Douro north to Vinho Verde and south to the Dao and Alentejo. Sue and I are fans of the Casa Ferreirinha Douro Valley wines, including especially the Quinta da Leda, which we love to pair with duck rice.

Sogrape’s strategy differs from both the Fladgate Partnership and Symington family models in that, while its base in Porto and Port is strong, its vision extends far beyond the Douro. It is, in fact, a global vision, as Sogrape’s extensive portfolio extends to Spain (including the famous LAN wines among others), Argentina (Finca Flichman), Chile (Chateau Los Boldos) and New Zealand (Framingham).

It may be surprising that a wine company from a relatively small country should have such a global reach, but remember that this is Portugal and globalization is in its DNA. The Portuguese practically invented globalization and their Port wines are a global icons. Sogrape, with its Mateus Rosé history, seems well prepared to ride the global wave.

Three Faces of Wine Strategy

So what are the take-aways from this wine strategy tour of Vila Nova de Gaia? The first is that there is a lot going on in Portuguese wine these days. If you haven’t thought seriously about Portugal and its wine recently, it is time to give it some attention.

The second point is that there are many routes to success in today’s market, something that is true in Portugal and elsewhere, too. A key seems to be to identify a comparative advantage and make the long-term investments needed to realize potential gains. Taylor’s has invested in expanding Port wine’s reach while investing in Porto and the Douro as a destination –leveraging the power of place. Port and Porto are inseparable — expanding the appeal of one necessarily raises the profile of the other.

The Symington family have adopted a strategy that focuses on the vineyards and communities — the social and physical terroir, with wines that reflect the region and investments that promote social welfare.

Finally, Sogrape leverages the local-global nexus, thinking global and acting local in a very Portuguese tradition.

What do these firms have in common besides Port and Porto? Well, they are all three family businesses that think in generational terms.  That long-term perspective makes it possible for the sort of strategies we see here to succeed.

Finding Growth in a Stagnant Market: What Can Wine Learn from Beer?

Although it is hard to pick out trends with confidence in the current topsy-turvy wine market environment, it is fair to say that there is growing concern that global wine consumption has reached a plateau. This is not a new phenomenon, as I wrote back in January 2019, when I pointed out “global wine’s lost decade.”

Where do you find growth in a stagnant market? One strategy, which I pointed out in a March 2019 column about Precept Brands success, is to take advantage of the fact that there are always some growing market  segments. Flexible producers will follow the money, investing where the growth is. Trying to take market share from other beverage alcohol categories in another strategy, of course, but wine suffers a cost disadvantage here. Wine’s per-serving cost is higher in general that either beer or spirits.

So what is to be done? A recent Rabobank report about global beer provides food for thought about what’s ahead for global wine. Beer? What can wine learn from beer? Well, beer hit a global sales plateau first and so has had more time to develop strategies.

Rabobank’s Beer Quarterly Q3 2021: The Beer Wars analyzes the beer industry’s response to stagnant demand in terms of the different strategies adopted in Japan, the US, and Europe.

Japanese Beer’s Diversification Strategy

The Japanese beer industry faced a crisis earlier than brewers in the US and Europe according to the Rabobank report, and so have had more time to find new growth strategies. Starting in the 1980s the beer market was disrupted by a combination of generational transitions (younger drinkers turned off by what they saw as grandfather’s beer), shifts in path to market (the rise of convenience stores and vending machine sales), and the advent of new competition in the form of chul-hai, an easy-drinking RTD cocktail.

Japanese brewers responded in many ways, including the innovation success of Asahi Super Dry, but the main strategy that the Rabobank report identifies is diversification into other product lines. Japanese brewers compensated for stagnant or falling per-capita beer sales by expanding into other markets from production technology to pharmaceuticals to nutritional supplements where existing strengths could be exploited. The process was slow, the report suggests, and required considerable investment.

It is easy to see wine industry parallels in the problems that Japanese beer faced. Generational transition? Shifting market pathways? Easy-drinking alternatives (think hard seltzer today). Constellation Brands has diversified within the beverage alcohol space through its Mexican beer business and made initial moves into cannabis, too. LVMH has long pursued a diversification strategy — its wine business is part of a diversified portfolio of luxury brands.

US Beer Follows the Money

A second strategy, which the Rabobank report associates with the US beer market, is diversification into other beverage categories such as ready-to-drink coffee and tea, energy drinks, sports drinks, hard seltzer, and so forth. Part of the logic, I think, is to exploit scale economies in beverage distribution and the name recognition derived from established brands and part is simply following market growth wherever it takes you. MolsonCoors changed its name to MolsonCoors Beverage to signal that it isn’t just a beer company any more.

I admit that I was stunned to see Pabst Blue Ribbon hard coffee on beer aisle of the local Safeway, but it fits with this strategy and reminds me of the time a few years ago when Coca Cola decided that it could leverage its distribution network  comparative advantage to enter the wine business by purchasing Taylors wine company (transforming it into Taylors California Cellars) as well as Napa Valley’s Sterling Vineyards. Coca Cola lost interest in their wine diversification strategy after a few years, however, as the margins on wine couldn’t match its soft drink profits and sold the brans to Seagrams.

It is easy to see some wine producers adopting this strategy in the US, too, especially in the canned segment where wine, various wine spritz drinks, and hard seltzer products fill the shelves.

European Beer M&A and Internationalization

Finally, the Rabobank report identifies an M&A and internationalization strategy that it associated with European beer producers. This is the “go big” part of “go big or go home.” European brewers such as Heineken and Carlsberg have evolved into firms with both multinational markets and multinational production networks, too.

Heineken is currently negotiating purchase of control of South Africa’s Distell, the world’s second largest (after Heineken itself) cider maker as well as an important spirits and wine producer. This transaction would further expand Heineken’s footprint in Africa, a market with substantial potential for growth.

Consolidation has been an important recent theme in the wine business, too. Gallo’s scale after the Constellation Brands deal is quite incredible. And I think this trend will continue both in wine production and distribution. But the global wine is still quite fragmented compared with global beer.

What Can Wine Learn?

Beer has had to face a stagnant global market for longer than wine and has developed a number of strategies to expand volume or grow margins. Very large wine companies have learned the lessons of their beer industry colleagues and pursued similar approaches, but it is still early days for wine compared to beer.

Can beer provide insights for medium sized wine producers, of which there are many around the world? This is less clear simply because consolidation in the beer industry has hollowed out this market segment

Sparkling Wine Surprises from England to Bali

Many of our friends are surprised when we mention English sparkling wine and it is easy to understand why. England isn’t exactly best known for its sunny weather. When economist David Ricardo wanted to illustrate his famous Law of Comparative Advantage, he used the example of England importing wine from sunny Portugal in exchange for warm wool cloth. English wine exports? Who’d have believed it?

English Sparkling Wine is a Thing

And yet English wine is not just a thing, it is a popular thing. But it takes some time for the word to get out. I hosted a virtual wine event for a UK group earlier this year that featured a wine from Nyetimber, a winery that helped put English sparkling wine on the map. About half the participants were familiar with the wine while the other half were taken by surprise. Everyone enjoyed it.

Sue and I were recently invited to sample wines from a leading English producer, Chapel Down. Chapel Down, as the 2015 video above explains,  is one of the largest and best-known wine producers in the UK with an expanding network of vineyard holdings and plans to further increase production. The wines are now available in the U.S. market through retailers in several states and via on-line sellers, too.

We sampled two Chapel Down wines: a Rosé Brut blanc de noir made with 100 percent Pinot Noir grapes and a Brut NV made with the three standard Champagne grape varieties with the addition of 5 percent Pinot Blanc. We all agreed that the Rosé was a great aperitif wine while the Brut NV was better with our meal of tuna and grilled vegetables. Both wines were easy to drink and enjoy — welcome additions to the sparkling wine category.

Chapel Down’s wines and those of other English makers benefit from a combination of factors starting with the vineyard terroir, which bears a resemblance to the chalky soils of the Champagne region (what do you think those white cliffs of Dover are made of?). Climate change has benefited English vineyards, both by providing more favorable growing conditions generally and by enabling a shift to classic grape varieties including especially Chardonnay and Pinot Noir and away from “usual suspect” cool-climate varieties such as Bacchus, Muller-Thurgau, and Reichensteiner. Add ambitious investment and mix with professional winemaking knowledge and technology and you have world-class sparkling wines.

Bali Sparkling Wine is Also a Thing

Prosecco, as I noted in last week’s Wine Economist column, has re-defined the sparkling wine category. Bubbles are not just for special occasions any more and they don’t just come from France, either. There is a world of sparkling wine out there and Champagne producers had a hand in creating it. Did you know that French producer Chandon also makes traditional method sparkling wines in Argentina, Brazil, California, Australia, China, and India?

Sue and I have been saving a bottle of sparkling wine from Bali, Indonesia to share with our friend Janice, who carried it back from a South Pacific trip in the pre-covid days. Ascaro, made by Sababay Winery, is a “Prosecco-style” sparkling wine made from Pinot Grigio and Muscat Saint Valier,  a cross between Seyve Villard 12 and Muscat Hamburg, which is generally grown as a table grape but has been used successfully to make wine in Bali for more than two decades.

We shared the wine with Janice and it was fantastic. Fizzy, fruity but not sweet, nicely balanced, with enough complexity to make things interesting — it was everything you would want from a sparkling wine on a warm summer evening. It would stand out in any line-up of similar wines from around the world.

Sababay Winery is an interesting project as my former student Ali Hoover reported in a 2014 Wine Economist guest column. The mother-daughter team of Mulyati and Evy Gozali founded Sababay because they were concerned about the economic circumstances of grape farmers in North Bali. The local table grape market had boomed and then came the bust, which left the farmers with high debt. The Gozali family  offered to help the farmers get out from under their debts and move toward economic stability by creating a market for quality wine grapes, which promised to yield more value to the farmers than commodity table grapes.

The project has been a success, as the video below suggests and a distillery has been added to the project. I have a bottle of award-winning Saba grappa spirits waiting for the right occasion.  When that time comes we’ll toast the Gozali family or their grace and determination.

The sparkling wine category is full of surprises. Glad to see consumers embracing the diverse pleasures that this part of the wine wall offers.

Anatomy of the Prosecco DOC Boom

Prosecco sales have boomed in the last decade, with the volume of Prosecco DOC global sales more than doubling. And, with the advent of Prosecco Rosé, they promise to continue their upward trend.

Booming Sales in a Stagnant Market

Sue and I had an opportunity to reflect on Prosecco’s surging popularity recently when the Prosecco DOC consortio invited us to participate in an online tasting timed to celebrate National Prosecco Week. The program included a webinar hosted by Mike DeSimone and Jeff Jenssen (aka the World Wine Guys)  and a tasting of Prosecco DOC and Prosecco Rosé DOC wines from Ruggeri, Anna Spinato, Pitars, Domus Picta, and Zardetto. The program was fun and informative. Many thanks to everyone involved.

The Prosecco boom is impressive, even more so when you consider that global wine consumption has been stagnant during the period shown in the table above. About the only wine market segments that have shown sustained growth have been sparkling wines (especially Prosecco), Rosé wines, and Sauvignon Blanc from New Zealand. Almost all other segments have been relatively flat or down.

The obvious questions to ask are why Prosecco and why now, but the a better question might be what took consumers in the US, UK, and elsewhere so long to embrace Prosecco’s many charms?

I Blame Champagne

I blame Champagne. Champagne has defined the sparkling wine segment for decades as a luxury product, which for most consumers means something to be saved for a special occasion. Weddings, birthdays, anniversaries, graduations. These were the times to uncork Champagne.  The substantial niche for sparkling wines at other times was largely unfiled. Prosecco — less expensive and easy to like — filled that niche, powered by a general willingness of consumers to embrace anything and everything associated with Italy.

I like to say that Prosecco is the Mark Twain of sparkling wine. The works of the great authors, according to Mark Twain, are like fine wine. Mine, he said with a certain false modesty, are like water. Everyone drinks water. And now everyone drinks Prosecco, too, and it doesn’t take a Hallmark greeting card occasion to pop a cork.

You can make Prosecco as simple or as complicated as you like. A large majority of the wines are Prosecco DOC (and most of those are quaffable Extra Dry wines), which forms the base of the Prosecco pyramid. Enthusiasts can explore higher elevations: Prosecco DOCG, wines from the Rive (designated vineyard areas), and finally Prosecco from Cartizze, a legendary hilltop vineyard area.  A Prosecco Pyramid tasting  expedition is fun, informative, and doesn’t cost an arm and a leg. You should try it!

 

The Rise of Prosecco Rosé DOC

Have you seen the new pink Prosecco? Prosecco Rosé DOC came into the market with the 2020 vintage. It is a blend of Glera, the Prosecco grape variety, with up to 15% Pinot Noir. We have started to see the wines on local store shelves in the past month or so — I think some shipments were held up a bit by the logistics problems that plague international trade.

Pink sparkling wines from the Veneto are not a new thing, but the wines couldn’t be called Prosecco until the DOC rules were modified to allow this use. Prosecco Rosé is a DOC wine — the DOCG rules haven’t changed.

Will Prosecco Rosé be a hit? As you can see from the graphic above, the Prosecco producers expect sales to more than double between 2020 and 2021. Demand might in fact be even higher — there is actually a supply-side constraint until new plantings of Pinot Noir come into production.

Sue said that she’s not sure there really needs to be a pink Prosecco. The traditional wine — such as the delicious Anna Spinato Extra Dry DOC included in our samples — is plenty good enough. But she enjoyed the pink wines, especially the pale and well-balanced Zardetto Rosè  Prosecco Extra Dry,  All the Prosecco Rosè DOC wines benefit from an extra month on their lees, which gives them a richer mouth-feel.

Is Prosecco Rosè DOC the next big thing? Too soon to tell, but the wines we sampled make a good case for a pink Prosecco boom that’s an echo of the boom that’s already here.

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I enjoy drinking Prosecco so much that I’ve never thought about cooking with it. Until now. I was pleased to receive a book called The 100 Prosecco Recipes by Italian winemaker Sandro Bottega, which highlights both Prosecco and many of the indigenous food products of the Veneto. A beautiful volume, it has given me lots of new ideas.

There is one recipe in particular that I can’t wait to try once the summer heat wave has passed. It is a very different idea of risotto. You make a broth from water flavored with thyme and herbs. You cook the risotto in the usual way using the herb broth and  at the end, you mix in a bit of olive oil instead of butter and cheese.

Where does the Prosecco come in? At service! You pour a little Prosecco into a pool you have made in the risotto (and then, I think, you pour some more into yourself). It seems to me that this last-minute addition could be spectacular and set off the other flavors. Worth a try, don’t you think?  Many thanks to Bottega for the book and great ideas.

Scratching the Surface of Croatian Wine

We finally pulled the cork on that bottle of Croatian wine we’ve been saving. It was a Babić from Rak winery — a gift from Dr. Matt Horkey that we set aside to share with a particular Croatian-American friend and then, well, covid happened and lots of things, including this wine, were put on hold.

Croatian Wine Uncorked

The wine was terrific. Babić is a medium-bodied red wine with nice fruit and good balance and acidity, and a certain distinctive character. It matched up well with the sausages we served that night.

Babić is a common family name in Croatia, I’m told, but the wine less so both because Croatia produces more white than red and because another red grape, Plavac Mali, is more famous and readily available. The sources I consulted all talked about the potential of this wine when the vines are not over-cropped and the Rak wine we tasted makes a strong case. Croatia is blessed with dozens of indigenous grape varieties. Our first taste of this Croatian wine makes us thirsty to learn more about them.

Croatian Wine in Context

Croatian wines have yet to make a big dent in the U.S. wine market. A search of Total Wine’s national online inventory turned up just 9 wines in total including two Plavac Mali and a cheery cherry wine, which I think  we found at a local store a few years ago and enjoyed.

When Croatian wine comes up in conversation it is often in an unusual context. The famous California winemaker Mike Grgich, for example, was born in Croatia and many fans of his  Napa wines know that he has established a winery called Grgić Vina in his native region of Croatia.

Croatian wine also comes up in discussions of international economic relations. You probably know how protective some European regions are about their appellation designations. Don’t even think about calling your local sparkling wine a Champagne, for example. It’s a big deal because that designation is very valuable.

Prosecco is a valuable name, too, and Prosecco producers are doing their best to keep others from using it. Australia and the European Union, for example, have had fairly high-level discussions about the fact that the sparkling wines the Aussies make in the King Valley are called Prosecco. The Italians object on both principle and economic interest, as you might expect.

They have also objected to the name of a Croatian dessert wine called Prošek. It isn’t hard to tell the wines apart. Prosecco is light and sparkling, produced in vast quantities for a global market. Prošek, made from dried grapes, is sweet with a tiny total output.  The similarity in names has been a sticking point in relations between Italy and Croatia before and, as The Guardian reported last month, has become an issue once again.

Croatian Wine Touring Guides

The idea of visiting Croatia and exploring the wines in person at some point is very appealing and I already have two guide books to help me navigate the complicated wine scene. The first, which we reviewed back  in 2017, is Crackling Croatian Wine: a Visitor-Friendly Guide by Dr Matthew Horkey and Charine Tan, written as part of their Exotic Wine Travel collection.

The  second book, which was published just a few months ago, is Croatian Wine: Regions, Grapes, and History by Greg Viola. Viola is a U.S. Foreign Service Office who obviously used his time assigned to the Croatian embassy to learn as much as he could about the country and its wine scene.

First glance at these two slender paperbacks (or handy e-books) suggests that they cover much the same territory: regions, grape varieties, wineries, and so forth. Both provide tips for wine tourism in Croatia, which was a growing activity before the pandemic and is sure to return as travel opportunities re-emerge.

Having spent a little time with the books, however, I’ve come to think of them as complements, not substitutes. The authors may write about many of the same topics, but they come to Croatia from different places and look for (and see) different things.

Viola admits that he’s not a expert wine taster, for example, so his tasting notes aren’t quite as rich as those of Horkey and Tan, who have served on professional tasting juries and offer more information about particular wines and winemakers.

On the other hand, Viola provides a really strong sense of place and seems particular good at giving the local knowledge that wine tourists typically crave.  When we read Viola’s description of Brac to our friend he said “that’s it!” That’s where his family came from. There are lots of travel tips and I admit that my favorite appears in an endnote, where he advises that the island of Vis, like most of the Croatian islands,  is free of the roughly 31,000 unexploded landmines left over from the Homeland War. Good to know.

Both books are well written and interesting and, together, are offer a fun and informative introduction to Croatian wine and wine tourism. A good place to begin if, like me, you want to scratch the surface of Croatian wine.

What Can Wine Learn from the Cruise Ship Industry?

Here is a “flashback” column from pre-covid 2017 that asks what wine can learn from the cruise ship industry? That’s an  unexpected question but, as you will see below, I think there are some potential insights.

What does wine have in common with cruise ships? As we have seen, both on-premise wine sales and cruise ship revenues have been badly affected by pandemic restrictions. But there is more to it than that. Package tours are a bit like the “mystery box” wine promotions that I wrote about in May 2021.  Mystery boxes are popular in China these days because they allow wine companies to sell off surplus products without cutting individual product prices in a way that can undermine brand positioning. Very clever, don’t you think?

Cruise packages and proprietary wine clubs (like those sponsored by the New York Times and Wall Street Journal, for example), have more in common than you might think and provide potential insights into the psychology and economics of wine consumer behavior. Enjoy!

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I keep finding cruise brochures folded into the weekend newspapers that arrive here at Wine Economist world headquarters. Ads of various sorts for wine clubs associated with those same papers show up frequently, too. That got me thinking, which is usually a mistake. What do ocean or river cruises and those wine clubs have in common? Intrigued? Read on.

They come in the mail and stuffed in weekend papers — brochures for ocean and river cruises and barge-and-bike tours. It is hard to resist the temptation to thumb through them and imagine visiting all these far-away places. You’ve done it, haven’t you?

Thousands and thousands of full-color printed brochures — this seems like a pretty expensive way to solicit customers. There must be something about having those pages and pictures in your hands that is especially important. Or maybe it is that the demographic that still reads a physical weekend paper and can afford to pay for it is a juicy target.

Experience Deficit Disorder

Several things about the tours strike me as important and relevant to wine. The first is that tours are “experience goods” — you cannot really know if you will like river touring, for example, until you actually try it. And then, if your experience is a good one, the odds of a second trip go way up (and the cost of customer acquisition way down).

The most important thing in marketing an experience good is to get people to try it the first time. The cruise industry seems to be good at this, so perhaps there is something to be learned by studying their strategies.

Wine is obviously also an experience good. Hard to know if you will enjoy a wine (or how much) before you pay the bill and open the bottle. If you like it, you are likely to come back for more. No wonder winemakers go to so much effort and expense to hold tastings of their wines.

The Olive Garden restaurant chain has a very successful wine program that is built around their practice of offering free tastes (as allowed by local law). One taste makes a customer more often than not.

Those colorful cruise brochures and television videos (think  PBS’s “Masterpiece Theater” sponsorship) try do the same — they give potential customers a “taste” of what cruise life is like. But for the most part neither wine now cruise ships can entirely overcome the obvious experience deficit disorder. So they need a strategy around it to give buyers confidence to take the plunge.

A Little of What You Fancy

Since cruise lines and independent “professionally curated” wine clubs of the sort that are often associated with newspapers and airline mileage programs cannot give all their potential customers actual samples of their products, they both seem to sell the glamour and exotic nature of the experience and hedge their bets in an interesting way.

Cruise tours seldom spend more than a few hours in any single port of call. If you love today’s stop, you can always come return on your own, but if you find you hate Venice (is this even possible?), don’t worry. You’ll be back on the boat and headed for another destination before you know it.

Some of the wine clubs that advertise in the weekend papers seem to work in the same way. Don’t worry about getting a case or even a six-pack of a particular wine you don’t like. Each case has at least six and sometimes twelve different wines. Don’t like this wine — don’t worry, because it is gone just like that. But you can order more of anything you fall in love with.

The fact that the details of the experience — the particular wines, the particular travel route — are made by experts, not the buyer, seems important, too. You buy the package and leave the rest to the experts. The modest commitment comes with relatively modest effort and emotional investment.

The low commitment strategy doesn’t appeal to everyone among either tourists or wine buyers, but its persistence in both spaces suggests that there is a market for it. Especially when there is a big discount involved.

Affordable Luxury

Nice wine and ocean and river cruises are luxuries from an economic point of view. No one has to buy them and there are always cheaper alternatives. The trick to getting the weekend newspaper-reading public to try them seems to be to make them simultaneously very luxurious and a tremendous bargain.

Thus the cruise lines advertise stratospheric rack rates for their services, which are then deeply discounted. The “full brochure fare” for the cheapest stateroom on a 10-day Mediterranean cruise in the flyer that arrived a few weeks ago is $9,999 (including economy airfare from certain gateway US airports). Wow, that’s a lot of money. Must be quite a cruise.

But wait, if you act now this wonderful experience can be yours for just $2,999 (airfare included) or $1,999 if you book your own flight. Lifestyles of the rich and famous at a fraction of the list price. Who can resist?

For the record the full brochure price of the most expensive cabin for this 10-day cruise is … wait for it … $33,998! But your price is just $14,999 or $13,999 if you pay your own airfare. Needless to say, this top-of-the-line listing makes the $2,999 of that bottom-tier inside stateroom seem an even better deal than before. Or maybe you would like to upgrade to the $4,599 veranda stateroom?

Wine club ads (and most supermarkets) adopt a similar strategies. Wine club ads seem to stress both the high retail value of the wines and the low low price that you will pay. Sometimes the introductory offer prices are so low that they must be intended solely to entice buyers into the first “experience” purchase, counting on repeat order for profits.

Foot in the Door?

I don’t see anything wrong with how cruise lines and wine clubs market their services. If this low-commitment affordable luxury strategy is successful in introducing people to wine and travel — and if they enjoy themselves — then that’s a plus.

Remember this. Most consumers don’t drink wine (here in the U.S. about 40% of adults don’t consume any alcohol at all). And most of those who do drink wine do it only a couple of times each month. There is much work to be done to introduce these consumers to the pleasures of wine and if thinking about wine as if it were a luxury river cruise can help, I am all for it.

The point of this that sometimes those of us in the wine space think that wine is so special that we fail to see how it relates to other products and experiences. It’s a good idea to pay attention to how other  experience goods present themselves to consumers and to note how those consumers react.

Bicycles, Locomotives, and Wine Market Growth

Growth is the big question mark for the global economy and for the US wine market. The International Monetary Fund released their report on global growth last week, for example, and it was one of those situations where  you wonder if your glass is half empty or half full.

The forecast for global growth was in the range of earlier estimates — about 6% economic growth for 2021 — but this solid expected performance was a combination of higher growth for the U.S. (7% growth) and some other developed countries with downgraded growth forecasts for less developed countries (LDCs), many of which continue to struggle with the covid pandemic.

The Global South is experiencing unexpected headwinds. Although many LDCs are projected to grow faster than the richer countries, as the table at the bottom of this column shows, the LDC growth rates shown here are lower than previous projections.

A two-speed global economy, where rich regions accelerate and poorer countries slow down, inevitably exposes fault lines that no one wants to see break open.

Planet Wine Concerns

Here on Planet Wine we are concerned about growth, too. 2020 was a good, bad, and ugly year for wine. Some brands did very well pivoting to new sales channels, others struggled to hold their own, and some really suffered. Many analysts believed that as the economy opened up from pandemic restrictions in 2021 we’d see a surge of wine spending, a rising tide of wine sales to raise all boats and solve a lot of problems.

That does not seem to have happened yet and so there is much concern. Why hasn’t broad wine market growth returned along with rising economic activity in general? Has the wine market changed in some fundamental way while we were pre-occupied with other things? Did the pandemic accelerate a market decline that was already under way?

The Bicycle Theory of Growth

As a recovering economics professor, I can’t think about questions of growth without picturing bicycles and locomotives because, unlikely as it may seem, these are useful ideas when analyzing growth.

The Bicycle Theory of Growth was originally invented to describe the dynamics of the European Union. The idea was that the EU is like a bicycle. It is safe and stable so long as it keeps moving ahead. But, like a bicycle, it becomes unstable once it stops and can easily tip over. The Bicycle Theory has many applications — I think the situation in China is a good example. Every important institution contains a variety of tensions and conflict, and pushing ahead — growth — is a way to deal with them. Once growth comes to a halt, inherent  instability takes over.

The wine market is much the same. The wine business has many structural problems, but strong growth can patch up some of the weaknesses. Every week my email inbox is filled with press releases that stress growth. New AVAs. new wine brands, new wine products. Everyone is trying to grow their patch of the wine business and that can work OK if the whole market is growing, too.  But that growth was already slowing down before the pandemic and now things look even worse.

Houston, do we have a bicycle problem?

The Locomotive Theory of Growth

How do you keep your bicycle moving ahead? In global economics we also talk about the Locomotive Theory of Growth. All the countries are like freight cars. They may have different ultimate destinations, but right now they are linked together in a train and heading in the same direction. It would be great if several  cars helped push the train forward — and sometimes that actually happens — but all that’s really necessary is that one or two big countries or regions have enough growth to pull the rest along. Like a locomotive, get it?

The U.S. is the global locomotive in 2021 according to the IMF analysis, with fast growth powered by huge fiscal deficits and $120 billion per month of Federal Reserve quantitative easing asset purchases.  Even with these massive injections, however, the U.S. economy only recovered to its pre-pandemic level in the 2nd quarter of 2021, so there were about 15 months of lost potential growth — a bit less aggregate impact than earlier forecasts projected, but still a substantial hit.

The global economy overall has also recovered to 2019 output levels, but this is mainly because of growth in the US and China. You might think that China’s amazingly quick recovery would pull the world ahead, but the Chinese economy has taken an inward turn that limits its international impact.

So all eyes are on whether the U.S. economy can keep up the head of steam it has developed and sustain it through the end of some of the stimulus payments and the Federal Reserve’s quickly-approaching asset-purchase “tapering.”  It’s a big deal because if the U.S. locomotive slows, what country or region take its place? There is also the problem of how tightly the train is liked together, which why the IMF is so concerned about the two speed growth finding.

How does the Locomotive Theory apply to wine? Well, maybe it doesn’t! But even before the pandemic the US was losing steam as the global wine market locomotive. Many hoped that Chinese wine buyers would pick up the growing slack, but the most recent OIV statistics suggest that hasn’t happened.

Why has US wine consumption lost momentum? Maybe the US problem is this: not so long ago the wine market was dominated large mid-market segments that sort of pulled the whole industry along with them. I don’t want to push this too far, but it was sometimes almost possible to talk about the wine market as a whole and it would mean something because the segments were linked together to a certain extent.

Now — and I do think the pandemic has magnified this — the market segments are not so well connected. The locomotive in 2020 was wine in the segments that NielsenIQ calls Luxury and Super Luxury. It is hard to see how  this strong growth helped pull the rest of the market along.

So I have the same concerns about the wine economy that the IMF seems to have about the global economy. Can the locomotive effect endure? And what happens if the train it is pulling falls apart?

 

Here is a summary table from the IMF report with the most recent growth projections updates. See the full report for details.

Global Wine Trade: Headwinds, Obstacles, Distortions

Wine has become one of the world’s most globalized consumer goods. The OIV estimates that 45% of all wine crosses at least one international border on its way from producer to consumer. And that’s just the finished product. If we examine the whole product chain, to include bottles, corks, and so forth, wine’s globalization index would be even higher.

So it is significant that wine today faces headwinds, obstacles, and distortions that make global wine a risky business. Taken together, these forces impact every part of the wine trade.

Headwinds

The covid pandemic has created new headwinds and magnified some existing ones that make global wine trade more difficult and uncertain. On-premise sales are critically important to some segments of the wine industry, for example, and the recovery from lockdowns  is slow, uneven, and uncertain. Bars and restaurants have struggled to refill to capacity in many cases, even where rules permit this, because of both uneven response by wary consumers and difficulty attracting and retaining service sector workers.

Many wineries invested time and effort into establishing alternative paths to market during the pandemic and now they must wonder whether direct-to-consumer and other strategies will continue to be as critical to success and what aspects of these efforts should be expanded in the future. There are a lot of puzzle pieces to put together as we move into the new normal and the picture that they create won’t be the same as it was pre-covid.

Obstacles

Wine globalization has been powered by favorable trade policies and efficient transportation logistics over the last 50 years, so it is significant that obstacles have appeared in both areas.  US tariffs, Chinese tariffs, Brexit uncertainty — the list of trade policy factors that create barriers to particular wine flows is much longer than in the past and some counties (Australia, I’m looking at you) have been hit particularly hard.

But an even bigger obstacle for wineries not directly affected by trade policy has been the breakdown of ocean shipping logistics, which moves bulk wine, packaged wine, and intermediate goods such as bottles and corks. A world-wide shortage of shipping containers is to blame and big increases in the costs of shipping a container is one result. Port congestion, which adds extra days or even weeks and much uncertainty to shipping schedules, is an unwelcome side effect.

Distortions

Finally, foreign exchange rates have introduced or magnified distortions in the relative prices of wine on international markets. The graph above shows how the US dollar (USD) has fallen relative to the Euro in the pandemic period.  The dollar has recovered a bit of its value recently, but it is hard to know if this rise can be sustained. In general, a falling currency encourages exports and discourages imports. The impact on US wine exports has been muted, however, by the several factors noted above including especially demand-squelching pandemic lockdowns in target markets.

The dollar’s fall came as a bit of a surprise, as I noted in a column about a year ago.  Now there is another surprise. The Economist newspaper reports that the dollar is still over-valued by over 10 percent against the Euro!

The Economist released its most recent Big Mac Index report last week, which uses international fast food  hamburger price differences to estimate the relative purchasing power of various currencies. This might sound like a foolish exercise, but the Big Mac Index has a pretty good track record as a general indicator of over- or under-valued currencies.

The June 2021 Big Mac Index finds only four currencies over-valued relative to the USD, so the currency distortion would favor US wine export sales. Significantly, Sweden (+9.6%) and Norway (+11.5%) are in this group and they are both importanr potential export markets for US wine.

The list of currencies that are under-valued compared to the USD is long and includes a number of significant wine producing countries that gain an advantage from the exchange rate mis-alignment.

  • Euro area -11.1%
  • Australia -15.2%
  • New Zealand -15.7%
  • Argentina -30.2%
  • Chile -30.3%
  • China -38.3%
  • Moldova -48.8%
  • Romania -55.5%
  • South Africa -59.6%

Several of these countries are important wine exporters and so their under-valued currencies give them a cost advantage in competition for US sales. Global wine has always been a tough business. The current combination of these headwinds, obstacles, and distortions make the global wine trade particularly challenging as we head into the fall.

Pink Power: Five Rosé Market Trends to Watch

Summer is here and shop shelves are filled with pink wine. Rosé isn’t just for summer any more, but sales do rise at this time of the year and so it is appropriate to take a look at global market developments. Herewith five Rosé  market trends to watch.

Pink Prosecco is a Thing

I have tasted a number of refreshing pink sparkling wines from northeast Italy in recent years. I remember one in particular that was a blend of Glera, the Prosecco grape variety, and Raboso, an energetic red (Raboso means “angry” in the Venetian language). It was like a pink Prosecco, but couldn’t be called that because the DOC rules didn’t allow for it.  The rules have changed for this year’s releases, however, and Prosecco DOC Rosé is now authorized. The wines must contain at least 85% Glera with 10-15% Pinot Nero (Pinot Noir) to supply the pink tone.

Prosecco has been a hot wine market category in recent years and Rosé sales have surged, too, so how will Prosecco Rosé be received? It will be interesting to find out. As a side note, I am impressed with the entrepreneurial attitude of the Prosecco consortium. Many appellations stick to the old rules even when the market shifts, forcing producers to move to IGT wines. The introduction of Prosecco DOC Rosé  shows an awareness of market trends and a willingness to seize the moment to build market potential.

The French Pink Paradox

A new report called Rosé Wines World Tracking 2021 has been released that provides information about global Rosé wine trends through 2019. Sifting through the data it is hard to miss the central importance of France in this market segment. France was the #1 producer of Rosé wines in 2019 with 34 percent of global output and the #1 consumer of Rosé wines with 35 percent of global sales.

France was #1, too, in per capita Rosé wine consumption at 15.l liters per person. Uruguay was #2 in per capita terms followed by Cyprus, Belgium, and Switzerland.  The pink tide is on the rise in many regions — Australia once exported Rosé but is now a net importer according to the report.

With so much Rosé produced you would expect France to be a leading exporter. And it is. Provence is especially dependent on Rosé export sales, for example. More than 90 percent of Provence wines are pink! But — and this is the paradox — France is actually the #1 Rosé wine importer by volume and #3 (after the US and UK) by value. France imports inexpensive Rosé from Spain, for example, and exports more expensive Rosé to the rest of the world. The average ex-cellar price of French Rosé exports is 3.7 euro per bottle versus 0.7 euro per bottle for Spanish Rosé wine exports.

Spain’s Value/Volume Dilemma

I don’t see that many Spanish Rosé wines on store shelves in my area, so it comes as a bit of a surprise that Spain is the #1 exporting country by volume. The report indicates that Spain accounts for more than 40% of Rosé export volume — an incredible amount — but only 18% of global export value, just behind Italy and well ahead of the US, the #4 exporter. The volume/value difference ranking difference is explained by Spain’s very low average export price.

Sue and I tasted a number of pink wines during a visit to Spain a few years ago and many were terrific. We were shocked when we learned about the prices they were getting for these wines and encouraged them to think big at least in terms of the US market. Americans think that cheap Rosé is swimmingly pool wine, we told them, and they won’t buy it. You’ve got to ask a premium price to get sales. But that’s easier said than done. Not easy to shift a price point once it is established.

Swimming Pool Wine?

Many people turn up their noses at Rosé wine. I don’t like Rosé, they say. What does that mean? It can’t mean the flavor or the quality of the wines because Rosé  comes in so many different styles from so many different places made with so many grape varieties. You can’t hate them all. To paraphrase Dr Johnson, anyone who is tired of Rosé  is tired of life.

But I suspect that you know what the real problem is. People don’t want to be identified with Rosé because Rosé  has an image problem in some circles. And some of the wines deserve that reputation, but others certainly do not.

The image issue isn’t helped by a new product I discovered at the market today, French Pool Toy Rosé  Tote. It was on sale for $21.99 per pouch. Convenient for trips to the pool or the beach. Not a bad idea, but not necessarily the best optics in terms of elevating the image of the wines.

Respecting Rosé  

“I don’t get no respect.” That was Rodney Dangerfield’s signature line and it applies to Rosé  to a certain extent. But that’s changing and Elizabeth Gabay MW is one reason why. She has devoted a good deal of her energies in recent years to helping us understand and appreciate the evolving Rosé  world. Her 2018 book Rose: Understanding the Pink Wine Revolution  showed that Rosé  can be a serious wine and subject to serious study, review, and evaluation.

Now Gabay has released a Buyer’s Guide to the Rosé  of Southern France. If her first book was broad survey, the new volume is a deep dive into the heart of  French Rosé territory. Significantly, this is not a swimming pool book, but a serious professional guide.

Rosé, you seem to be growing up!

Flashback: the Very Model of a Modern Cooperative Winery

I’ve been busy working on a revision to my 2011 book Wine Wars and I had one of those deja vu moments. I was reading the chapter on “The China Syndrome,” which includes a report from my friend and former student Matt Ferchen, who was working in China at the time the book was published. Matt attended a wine fair in Beijing sponsored by Portuguese producers and sent me a report of what he found, which I included in Wine Wars.  Matt said that he was impressed with the Portuguese wines.

The first wines I tasted, and the ones I ended up liking the best, were from a cooperative called Adega Coop. de Borba. A couple of the wineries were family owned and there was a kind of earthiness to the wines that I really enjoyed. I was especially impressed with the Portuguese whites, which were all very crisp and I think would go very well with spicy Chinese food.

Adega de Borga? Sue and I visited that winery when we were in Alentejo in 2016. I had forgotten that Matt made a point to call it out in his report. It impressed us, too, so much so that I devoted an entire column to our 2016 experience, which I re-print here. Re-discovering Matt’s reference reminded me how surprised we were to discover this excellent example of a modern cooperative winery.

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

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

Beyond the First Glance

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

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

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

Adjusting to New Market Realities

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

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

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

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

Uphill / Downhill

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

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

Thought and Action

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

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