Crisis and Change in the Wine World

March 22, 2009 By Mike Veseth in Argentina, Barefoot wine, British wine market, decanter, Economic impact, exchange rates, globalization, Supply and Demand, wine bargains, wine magazines, wine markets, wine price, wine spectator, wine taxes Leave a comment

When the economic crisis began to unfold last year many people said that it wouldn’t affect the world of wine — people will still want to drink, they said, even more so when they are worried or depressed. Recession is good for wine, they assured us.

Well, we all know now that that line of reasoning was misguided. The crisis is hitting almost every shelf on the Wine Wall as consumers cut back and trade down (only a few value brands like Barefoot Cellars seem to be benefiting). The most recent issues of Wine Spectator and Decanter feature cover stories that are designed to appeal to recession-shocked bargain-hunting wine enthusiasts. (See note below.) Wine industry publications are packed full of stories about how producers, retailers and restaurants are coping with declining demand.

Cycle or Shift?

Now that we know that economic crisis is having a real impact on wine, it is time to think more seriously about what form that impact is taking. Most people that I have talked to are thinking in terms of boom-bust cycles. The current downturn will be very difficult — and a shake out will take place across the industry — but, they say, the wine economy will bounce back again once the economy itself starts to recover. This is probably the correct way to think about the future of wine markets, but it isn’t the only way.

A second possibility is that the crisis will produce a long term structural change in the wine market. The market won’t bounce back from its low, but rather will reset itself and proceed along a new and possibly unpredictable future path. Economists who study other sectors (finance, automobiles, agriculture) and taking the possibility of structural shifts seriously. Could it be happening in the world of wine?

I have given a lot of thought to question of cycles and shifts over the years. My best known work in this regard is a comparative economic history of public debt in advanced economies called Mountains of Debt: Crisis and Change in Renaissance Florence, Victorian Britain and Postwar America (Oxford University Press, 1990). (Mountains went out of print in the Clinton years when the US deficit went away, but George W. Bush and the current crisis convinced the publisher to bring it back).

One point of the book is that some crises are more significant than others. Sometimes a crisis is a tremor that shakes things up for a while but leaves the landscape pretty much unchanged. Other crises are major earthquakes, with more lasting long term implications. Maybe this is a “Big One,” at least in terms of wine. I’m going to use the next few blog posts to think through this important question.

The Market Center Shifts

One early indicator of structural change comes from London, the center of the wine world. Great Britain, as I’ve said before, is the most important wine market in the world. The British don’t drink the most wine in the world or produce the most, either, but they buy a lot of wine from other countries, making them the largest import market and therefore the focus of international competition (Germany and the United States along with Britain form the Big Three import markets).

But this may be changing. Britain’s economy is being badly battered by the economic crisis, as an article in yesterday’s Financial Times makes clear.

As the UK economy contracts at its fastest rate since the second world war, the … Industry Watch report predicts that more company casualties will follow in 2010. It says 39,000 businesses, or one in 50, are likely to fail next year.

Britain’s banking sector is in bad shape, perhaps even worse than the US industry, and its government budget deficit is also spiraling into the red. This has general wine market effects similar to those in the US (cutting back, trading down, switching over), but some different ones, as well, the most important of which is due to the exchange rate.

As Britain’s economy has imploded the pound has collapsed as well. The pound has fallen by about 25% against both the dollar and the Euro. It took about $2 (or €1.30) to buy a pound a year ago, now it is selling for $1.45 (or €1.06) today. This means that imported wine (which in Britain is, well, wine) costs much more because of the exchange rate at the same time that the slumping economy (and lowered expectations) are undermining demand. The US dollar, on the other hand, has appreciated relative to most currencies apart from the yen, promising wine buyers lower prices to match their reduced economic circumstances. So the recession is affecting wine in Britain more than the US wine market. A shift is taking place — is it temporary or will it be permanent?

Although it is too soon to know for sure, I think it is possible that these factors could cause London to lose its preeminent position in the world wine market. I see indicators in the decline of the Australian industry (complicated by other factors, I know — but the collapse of the British market is part of it) and the recent global focus on Argentina and its excellent wine values (both Wine Spectator and Decanter make this point).

Although Argentinean producers are looking to export wherever they can get a foot in the door, my strong sense is that they see their future in the U.S. market more than Great Britain. Perhaps they are at the head of the pack as the world wine market resets and proceeds on a different path.

[Note: Wine Spectator includes 18 tips on stretching your wine dollar. My favorite is tip #7: buy by the case and get a discount (page 55 of the April 30, 2009 issue). Sound advice, although the particular example cited may miss the point: “A 10 percent discount on a $300 case translates into a saving of $2.50 per bottle. That adds up fast.” The problem, of course, is that the people who used to buy those $300 cases are cutting back the hardest and I’m not sure that $2.50 a bottle is going to turn them around.]

Santa Margherita Syndrome

March 13, 2009 By Mike Veseth in Economic impact, Italian wine, Supply and Demand, Wall Street Journal, Washington wine, wine bargains, wine markets, wine price 1 Comment

Many articles have appeared recently advising wine consumers on “trading down” strategies for the recession — where to find the best values and bargains as the market slump continues. (Thanks to my crack team of research assistants — Michael, David and Tom — for your tips on this topic.)

One of the best pieces I’ve read comes from Dorothy J. Gaiter and John Brecher at the Wall Street Journal: 10 ways to save money ordering wine at restaurants. All their advice is timely, but rule #6 really caught my eye:

6. Never order Santa Margherita Pinot Grigio. We don’t mean to pick on Santa Margherita. We know many people like it and that’s fine. But because so many people like it, it is routinely one of the most outrageously priced wines on the list.

Nothing personal, Dottie and John said, it’s just supply and demand plus a certain bandwagon effect that seems to afflict wine drinkers when confronted with a complicated and uncertain set of choices.

We note it here only as a classic example of this: If you stay within your comfort zone, ordering only wines you already know, you will be punished for it, price-wise. In addition, no wine is going to seem like a good value to you when you know you could buy it at a local store for half the price or less. That’s why it’s so important to focus on labels or kinds of wines that you wouldn’t otherwise see. … Remember: There is value in tasting something new.

Sensible advice, although not always easy advice to follow in practice given the high cost of restaurant wine. Everyone wants to find that delightful unexpected bargain, but no one really likes paying the bill for a wine experiment that disappoints. So restaurants and wine consumers alike seem to find themselves drawn to a small set of “usual suspects.”

Demand and Supply

Wine & Spirits magazine surveys restaurants each year to try to discover trends both in general and in specific segments of the market. This year’s poll (see the April 2009 issue) provides early data on how the recession is affecting wine sales and some of the strategies that restaurants are trying to deal with this increasingly serious problem.

W&S provides a lot of information about what successful restaurants are doing to cope with the weak economy. One unexpected implication of the survey seems to be this:

Always try to sell customers Santa Margherita Pinto Grigio.

The W&S editors do not advise this, of course (they are very careful in this regard — they just report the findings); it just seems to be restaurant conventional wisdom.

W&S asks restaurants to identify the wines that they offer by the bottle or serve by the glass and then publishes the names of the most-reported products. The most listed wine-by-the-glass, for example, is Sonoma-Cutrer Russian River Chardonnay (11.1 responses per 100 restaurant replies), which sold for an average price of $12.67 per glass in 2008. Santa Margherita Pinot Grigio was #6 on the list (number six again … spooky), reported by 6.7 per 100 restaurants. It sold for an average price of $14.40 per glass in 2008.

A quick internet search reveals that Santa Margherita often sells for around $20 per bottle retail, which suggests a wholesale price of $14-$15 — suspiciously close to the $14.40 average per glass tariff. You can begin to see why it would be a popular restaurant choice. And why Dottie and John’s number one rule is …

1. Skip wine by the glass. Restaurateurs like to make enough on a single glass to pay for a whole bottle, which is great for them but not so great for you.

W&S lists Santa Margherita as the number one wine in both the Pinot Gris/Pinot Grigio and the Italian wine categories. The average per bottle restaurant price was $52, which indicates a somewhat higher mark up over wholesale than the usual restaurant rule of thumb. All of which makes me think that wine consumers need to become a bit better educated about wine economics because it is pretty plain that restaurants have been hitting the books on how to use demand and supply to preserve profit in these unsettled economic times.

What Should I Order?

So where are the values on restaurant wine lists? The simple answer is that there is no simple answer (apart from Dottie and John’s good advice). The W&S poll asked restaurants to list wines under $25 per bottle and the most frequent response was Cooperidge White Zin and Chardonnay, $24 average price. Cooperidge is a Gallo restaurant brand. Interestingly, it appeared in just 1.9 per 100 responses.

The number two and three bargain wines were both Ste Michelle Wine Estate products from Washington State — Chateau Ste Michelle Riesling ($24 / 0.7 responses per 100) and 14 Hands Columbia Valley Cabernet Sauvignon ($21.50 / 0.7 responses per 100).

No very strong conclusions can be drawn from this data but they do suggest that (1) there is no one wine or brand that restaurants consistently go to for the value-seeking customers, so you will have to explore the wine list carefully to find what you are looking for, but (2) it might be smart to include Washington State wines in your treasure hunt.

Wine Economist Top 100

February 22, 2009 By Mike Veseth in Mondovino, Shameless Self-Promotion, Supply and Demand, wine awards, Wine Competitions, wine critics, wine markets, wine ratings, Yellow Tail 2 Comments

This is the Wine Economist‘s 100th post. The idea of a Wine Economist Top 100 — my 100 best blog posts — is therefore kinda ridiculous.

But my wine enthusiast friends hungrily devour Top 50 and Top 100 wine lists even though the idea that it is possible to identify and rank the Top X [fill in the number] wines is kinda ridiculous, too, although in a different way. This provokes a digression on wine rankings and a brief report on what I’ve learned so far from writing this blog.

Supply and Demand

Ranking wines from 1 to 100 is certainly not an exact science; there are literally thousands of wines on the market, so narrowing down the list to 100 and then actually ranking them from bottom to top (with no ties) is necessarily a problematic exercise when examined closely.

Individual tastes differ significantly and consumers are not uniformly able to detect even objective qualities in wine (much less make comparable subjective judgments), so it is hard to see why so many people take these ratings so very seriously. But they do. It’s a matter of demand and supply.

Consumers demand wine rankings. They use Top X lists as guides to shopping (or investing) and sometimes as a means to establish status or credibility with other wine enthusiasts. This makes top wine lists a really useful tool for wine merchants and distributors, who supply what consumers demand (and sometimes try to help the demand along a little, too).

Wine critics must feel some pressure to supply what buyers and merchants want. The Top X lists get so much attention that any critic who fails to issue a ranking must be a little bit concerned about the effect of this action in the crowded wine opinion marketplace. If I ranked wines, which I don’t, I’d sure want to publish a Top X list of some sort if only to draw attention to my other work. Everyone has an interest in these lists, so it’s no wonder they are so popular.

Winner-Take-All

It is interesting to consider how Top X lists and the attention they receive may have invisibly shaped the wine world. Cornell economist Robert H. Frank has written two books that are worth reading in this regard. The Winner-Take-All Society (co-authored by Philip J. Cook, 1995) looks at what happens when market attention is focused on a few top-rated products. The result, not surprisingly, is that everyone wants the best (or what is rated the best) and the nearly-as-good and really-quite-pleasant are left behind. Who wants to drink pretty good Chardonnay when you can get a 90+ bottle for the same price (even if you cannot really taste the difference yourself)?

The book’s subtitle tells you where the argument goes: “How more and more Americans compete for fewer and bigger prizes, encouraging economic waste, income inequality and an impoverished cultural life.” If you’ve seen Mondovino, you know what Frank and Cook are talking about.

Frank’s 1999 book Luxury Fever continues the argument, looking more deeply at the impact of a world where status, identity and satisfaction are linked to money and the purchase of top-rated products. Frank talks about the high price that some consumers will pay for goods that are just a little bit better or harder to get. He calls it the “charm premium.” Unsurprisingly, he cites the “charm premium” that highly rated ultra-premium wines receive as an important example (pp. 29-30).

Elite winemakers can mine the charm premium effect by offering increasing expensive variations on their main product: regular bottling, reserve, single-vineyard and so on. Each increase in perceived quality (or decrease in general availability) produces a disproportionate increase in price. Or at least that’s how it is supposed to work.

Some wine merchants and producers see the charm premium in a different light. Wines that get 95+ points sell out immediately — they essentially don’t exist. Ultra-premium wines that receive less than 90 points are hard to sell, because no one wants a merely very good wine when they can get an apparently excellent one. (I understand that there is at least one wine store that automatically discounts any wine that is cursed with an otherwise unsellable 89-point rating.) That just leaves the 90-94 point wines and large charm premiums are sometimes paid for what must be impossibly small absolute quality differences within this range.

Wine buyers are a diverse group and so it is dangerous to generalize, but a lot of them search not just for good wine, but for the best wine (or the best wine value). For better or worse, Top 100 lists have evolved to satisfy that demand and have therefore helped spread luxury fever and create the winner-take-all wine market segments we see today.

Lessons Learned

I’ve been writing this blog for about a year and a half and it has been a great experience — I’ve met a lot of thoughtful, interesting people and had some great wine conversations. Because my posts are a bit longer than most — about 900 words on average — the total 100-post output is equivalent to a short book. What have I learned from this process? Well, I know a little more about what internet wine readers are looking for.

The most popular Wine Economist article in its 100-post history is my piece on Decanter magazine (The World’s Best Wine Magazine?), part of an occasional series on wine critics. This post gets a lot of hits because the web is crawling with people searching for “best wine,” “best wine magazine” and “world’s best wine.” The winner-take-all dynamic this represents shows up everywhere, even in my blog stats.

Almost as many readers are searching for the best wine value, which explains why my posts on[Yellow Tail] Tales and Costco and Global Wine are the second and third most read articles on this blog.

Wine industry readers are worried about the future, as most of us are in this economic environment. This helps explain why How will the Economic Crisis affect Wine? and Big Trouble Down Under: Crisis in Australian Wine receive so many hits.

Finally, many readers come here looking to unlock the mysteries of the wine buying experience. What do the ratings mean? Who are the most credible wine authorities? This search leads them to posts onWine by the Numbers and Masters of Wine (and Economics), which get dozens of hits each week.

Thanks for reading The Wine Economist. I’ll give an update on trends in reader interests and concerns in a few months, when I published the Wine Economist Top 150.

No Wine Before Its Time

February 10, 2009 By Mike Veseth in cork vs screwcap, Wall Street Journal, wine critics, wine markets 1 Comment

“We will sell no wine before its time.” That was the slogan of a famous Paul Masson winery advertising campaign. (See note at the end of this post.) But a lot of wine is sold before it has reached its peak.

What Time is It?

And that’s a problem for both consumers and producers. Immature wine is sort of like the flat-pack furniture they sell at Ikea — all the pieces are there, it is up to the consumer to take them home and complete assembly. Wine buyers are supposed to take immature but age-worthy wine home, stash it under the stairs or in a climate-controlled wine storage appliance, and remember to bring it out when the time is right.

(By the way, if you have any of the pry-top Paul Masson carafes pictured here aging under the stairs … well, you might not want to wait any longer to pop the lid …)

Unfortunately there are a lot of differences between fine wine and a flat-pack antique finish Ikea Aspelund bedside table. I suspect that most people knock together their Ikea products soon after purchase, so they know pretty quickly if all the pieces fit. Disappointment, if there is any, is soon realized and resolved.

Wine is a different situation completely. You can’t tell if a bottle of wine is sound (uncorked, untainted) just be looking at it. Every type of closure system has its flaws, as George Taber has explained. So aging wine is a kind of crap shoot. Even a professional can’t be sure that the wine cellar is full of good wine getting better or bad wine fading to oblivion. Each bottle is a mystery until opened.

Now maybe you know all about aging wine, but I’m really an amateur and I have no confidence in my ability to store wine properly and pull it from the cellar at its peak. I am not at all sure that I can tell when “it’s time.” More often than not I find that I have waited too long to open those “special bottles.”

Not that this always matters: most wine produced in the world today isn’t really designed with cellar aging in mind.

Time is Money

Why do wineries sell immature wine and leave it to amateurs like me to age it? Why don’t they store it properly and release it at or near its peak? The answer, of course, is that time is money. Few wineries can completely ignore the economic cost of holding their wines in bottle or barrel until they are mature. The incentive to market what I have called Chateau Cash Flow is very strong.

The result is that most wineries intentionally produce wines that are ready to drink when still quite young. I find nothing wrong with this when done well. Others sell their wine before its time and cross their fingers — hoping (often in vain) that consumers will delay consumption until the wine has more fully matured.

One consequence of this practice is the frequent disappointment consumers experience with fine wines, especially in restaurants. Some restaurants can afford to age rare and unusual wines and serve them at their peak. Most, however, find it necessary to sell them quickly, to produce that cash flow, with sometimes unfortunate results. It isn’t that these wines are bad, it is only that they are expensive (because of restaurant mark-ups) and often disappointing (because they years away from full maturity).

The cost of money is often the root of the problem — wineries and restaurants find it too expensive to properly age fine wines. Money is nearly free today, however — if you can get it. It is the limited availability of credit that is the current constraint. I suspect that we will see lots of product pushed into the wine value chain, using cash flow to compensate for the lack of available credit. This fact promises opportunity for the few and likely disappointment for the many.

Open That Bottle Night

Amateurs like me tend to be too patient (imagine that!) and let fine wine sit in the cellar too long. How can we avoid the curse of letting our best wines creep over the hill? Dorothy J. Gaiter and John Brecher, the wine critics at the Wall Street Journal, have an answer. For the last ten years they have been promoting Open That Bottle Night (it’s on Saturday 28 February this year).

OTBN is an excuse to break out those special bottles and drink them before they fade away. It isn’t a systematic solution to the problem of time and money, but it is a reasonable personal response. I encourage my readers to celebrate OTBN this year. Wineries may sell wine before its time — and many of us may drink them either way too soon or well past their prime — but there is no reason not to try to break this pattern.

———

Here is one of the original Paul Masson “sell no wine” commercials, featuring celebrity spokesman Orson Wells.

Here is an out-take, with an obviously inebriated Wells reading the lines.

How Many AVAs are Enough?

January 31, 2009 By Mike Veseth in Supply and Demand, Washington wine, wine brands, wine markets 3 Comments

“How can you govern a country with 246 cheeses?” Charles De Gaulle.

The US Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) recently approved the Snipe’s Mountain American Viticultural Area (AVA) designation — the tenth AVA in Washington State. There are nearly 200 AVAs in the US (click here to see the list), most of them in California. Not as many AVAs as French cheeses, but we are gaining on them.

This news provokes some thoughts on the meaning of AVAs and the obvious question, how many AVAs are enough?

Staking a Claim

AVAs are geographic designations — they tell us something about where a wine comes from. They “stake a claim” as the old prospectors used to say, in a particular patch of dirt (although it might be a pretty big patch, as the map indicates). Prior to the introduction of AVAs, American wines mainly were labeled by state — California Zinfandel, New York Riesling. These very broad designations are still used for wines made from grapes sourced from several different regions within a state.

A Zinfandel made from equal amounts of grapes grown in Sonoma, Mendocino and Lodi (three different AVAs) must wear the generic California designation rather than a more specific geographic indicator. At least 85% of the grapes must come from a particular AVA for its name to be used. Wines that blend grapes from different states are simply American and I’ve seen this designation from time to time — most recently on a California-Oregon blend.

The evolution of American AVAs is complicated, but I think it is fair to say that they generally began with relatively broad classifications and have in recent years become increasingly specific. In Washington, for example, the first AVA was Yakima Valley (1983), followed the next year by a much broader designation (Columbia Valley — see map above) that encompasses most of the state’s major vineyard areas and essentially replaced the “Washington” designation plus a second relatively narrow one (Walla Walla). Both the Columbia Valley and Walla Walla AVAs span the Washington-Oregon border, showing the vines and state lines don’t always align.

The Yakima Valley AVA has been partitioned by subsequent AVA claims and now includes three sub-regions: Red Mountain, Rattlesnake Hills and the new Snipe’s Mountain AVA. There are now seven AVAs within the Columbia Valley appellation, with an eighth (Lake Chelan) on the horizon. If Washington’s AVAs are this complicated, with AVAs and sub-AVAs, you can only imagine what the California map must look like.

Appellation Wars: AVA versus AOC

In America we talk about AVAs while the French and others speak of AOCs (or their equivalents) and you might assume that the concepts are the same even if the names are not. But you’d be wrong.

AOC stands for Appelation D’origine Contrôlée, a system that began as a simple geographic designation like America’s AVAs, but has developed into something more complicated and, well, more French. Originally AOCs were all about fraud prevention — protecting the reputation of honest Champagne winegrowers, for example, by making it illegal to put the Champagne label on a wine made mainly from grapes grown in other regions. This assurance, it was believed would give the Champagne regional “brand” greater value.

And it did, but this led to a different kind of fraud. Some producers cut corners, over-cropped and so forth, making cheaper, poorer wine that could legally wear the geographic designation because of the grape’s origins. The only way to protect the region’s reputation (and the value of its brand) was to regulate both where the grapes were grown and how the wines were made. And so the contemporary AOC system was born.

AOC regulations start with a defined geography and add detailed rules regarding wine making. They are meant to assure that the wines are made to a particular recognizable standard and are typical, in both type and quality, of the region.

(As we know from the Super-Tuscan controversy, winemakers don’t always agree believe that the AOC standard wine is the best wine that can be made — typical is not necessary superior. Super-Tuscans are wines, frequently excellent ones, that do not satisfy the AOC rules because they use non-standard grapes and non-standard winemaking techniques.)

AOC in USA: Coro Mendocino

There is only one AOC in the US as far as I know. A voluntary association of Mendocino, California wineries have created a wine standard they call Coro Mendocino. Coro means chorus in both Italian and Spanish and refers to both the harmonious group of winemakers behind this program and, I suppose the designated blending of grapes. You can read the production protocol here. The SipMendocino.com website explains that

Coro wines must be made exclusively from Mendocino fruit
Zinfandel is the dominant varietal and represents 40-70% of the final blend.
Second tier varietals may not exceed Zinfandel as a majority component and are limited to Syrah, Petite Sirah, Carignane, Sangiovese, Grenache, Dolcetto, Charbono, Barbera and Primitivo.
A “free play” of up to 10% of any vinifera source may be used for fine tuning if desired.

Coro Mendocino is a typically American solution to the problem of setting a standard. It is a voluntary association built around a shared commerciall brand — the labels of wines from different makers all employ a standard design so that they are recognized first as Coro Mendocino and only secondarily as the product of a particular winery. Coro Mendocino reminds me of the better known and quite successful Gimblett Gravels initiative in New Zealand, which is essentially a privately-sanctioned AVA within the Hawkes Bay region.

Too Much Information? Or Too Little?

Appellations are controversial at every level of analysis. In Europe, for example, the existence of hundreds of tiny regional subdivisions is seen by some as a roadblock to effective wine marketing. The wine market is being rationalized by the new EU initiatives and simplicity is the order of the day. Local winemakers are outraged, however, because they fear the consequence when their local appellation “brand” is merged into a less distinctive (but perhaps more marketable) regional appellation.

On a local level, I have heard many winegrowers grouse about whether a new AVA really has a distinctive terroir or if it just had enough money and political clout to get its designation. And of course the drawing of lines is controversial, since who is in and who is out can be pretty arbitrary at times.

From the consumer standpoint the existence of AVAs does potentially provide information. Theorists say that information is any news or data that reduces uncertainty. In wine, information would reduce the buyer’s uncertainty about what’s in the bottle and so increase confidence in the buying decision. Sometimes AVA or AOC designations do this, but not always. Buyers need to know what the appellations mean and this can be problematic if the regions are very large and diverse in a geographic sense and if the producers make wines in very different styles.

And, of course, too many AVAs can produce a sort of ungovernable confusion of the sort that De Gaulle bemoaned in France. Uncertainty increases with the number of AVAs at some point.

I will be interested to see how the reputation of the Snipe’s Mountain AVA develops. It certainly is a distinct geologic feature of the Yakima Valley (check out this map), but the reports that I have read stress its historical importance more than its terroir. Snipe’s Mountain was the site of one of the first important plantings of vitis vinifera grapes in Washington State.

Wade Wolfe, who knows Yakima Valley maybe better than anyone, has made wine from Snipe’s Mountain fruit and thinks it could have a bright future with the additional attention the AVA designation draws. If so, then one more AVA is will not be one too many.

Cooperatives and Fair Trade Wine: Unraveling the Paradox

January 27, 2009 By Mike Veseth in brands, cooperatives, Fair Trade wine, Supply and Demand, wine markets 3 Comments

My previous blog entry (see below) presented a paradox. Fair Trade wine might be an effective “ethical consumption” good, I speculated, because wine is one of the few products where consumers routinely know something about production conditions (the who, what, where, when, how and why) and so might be motivated by ethical considerations, such as the equity of grower payments or environmental impacts.

But Fair Trade programs are typically organized through grower cooperatives and coops have a famously bad reputation for quality (see previous blog entry for details). So the paradox is that while wine might be an ideal Fair Trade product from the consumer standpoint, the cooperative production model dooms it to failure because of low production quality.

Sad, if true. But is it?

Re-Thinking Wine Cooperatives

It is time that we reconsidered wine cooperatives because the old stereotypes do not always hold. From a statistical standpoint, cooperatives are far more important than most of us suspect. My guess is that more of the world’s wine is made by cooperatives than by the all the huge multinational wine corporations put together.

The Oxford Companion to Wine reports that over half of all French wine production is by cooperatives (caves coopératives). About two-thirds of German growers are coop (winzeverein) members. Italian cooperatives (cantina sociale — see the vintage wine poster above) are responsible for as much as 60% of total national output. Similar high proportions are reported for Spain and Portugal. That’s a lot of wine!

Since France, Italy and Spain are the largest wine producers by various measures, it follows that a huge proportion ( perhaps 25% to 30%) of the world’s wine comes from cooperative cellars. Gallo, by comparison, accounts for about three percent of world production, if the calculations I made a few years ago are correct.

Within this huge puddle of coop wine there is great diversity. Certainly there is a lot of bad or mediocre wine. Reunite, the Italian cooperative famous for its sweet Lambrusco, is an easy target if only because it is so large and ubiquitous. Some people say that Reunite destroyed the reputation of Italian wine in the United States in the 1970s with its low quality offerings.

But there are a lot of well-made cooperative products, too. A recent supplement to Decanter magazine, for example, highlighted a number of very successful Italian cooperatives, including San Michele Appiano and Cantina Terlano in Alto Adige and Produttori del Barbaresco in Piedmont. These cooperative make some of the finest wines in Italy, consistently receiving top marks (three glasses) from Gambero Rosso.

Ugly, Bad and Good

So why do some cooperatives produce fine wine and others make plonk — and which kind of wine will Fair Trade coops make? There is no simple answer to this question because there are several different motives that drive cooperatives with correspondingly different results.

Sad to say, some European cooperatives find themselves organized around national and EU regulations that have until recently given special benefits to cooperatives. These are subsidy cooperatives and they have had little incentive to quality produce wine because they have been insulated from market forces. Changes in EU wine rules should put these cooperatives on the endangered species list.

Then there the political cooperatives. Many of the coops organized in the 1920s and 1930s were motivated more or less by socialist or communist political ideologies. Their desire to earn short run revenue, and to share it equitably, often conflicts with the long run need to protect quality and develop markets. If solidarity requires that no member’s grapes be turned away, no matter how poor their condition, how can good wine result?

Market forces are forcing the political cooperatives to upgrade their standards, however. Payments are generally no longer based on tonnage alone. Now ripeness (potential alcohol) and other factors are also considered in many cases. It is a necessary step in the right direction.

Finally, there is a group that you might call the efficiency cooperatives. They are motivated by fundamental market factors rather than subsidies or grower solidarity. This is a diverse group of winegrowers who share resources in order to be able to afford costly up-to-date technology, the services of skilled winemakers (including the controversial flying winemakers) and even marketing expertise.

The best of these wineries, like Produttori del Barbaresco, have created valuable brands that must be protected at all costs. Quality wine is the objective, cooperation is mainly the means that allows small individual growers to reap some of the advantages of a large scale operation.

Back to Fair Trade Wine

So what kind of wine will Fair Trade cooperatives produce? The answer is that some of it will likely be very good, as I have reported earlier. But just as there is no reason to believe that all cooperative wine will be bad, there is nothing to say that all Fair Trade cooperative wine will be good. It will depend upon the motives and actions of the individual producers. Fair Trade wine, in other words, will be like other wine. Or at least that is my guess.

And that’s too bad, because the advocates of Fair Trade products would love it if “Fair Trade” became a brand that consumers associated with quality (and perhaps it will be). But being Fair Trade won’t be enough. This wine, like others, will have to earn a place on the table.

Note: Thanks to Martin Cubertafond at Sciences-Po in Paris for insightful correspondence on this topic.

Cooperatives and the Fair Trade Wine Paradox

January 24, 2009 By Mike Veseth in cooperatives, Fair Trade wine, Supply and Demand, sustainability 3 Comments

My first taste of Fair Trade Wine was very satisfying, as I explained in this space a few weeks ago. The New Direction Malbec that Sam’s Club has been selling for about $10 makes a strong first impression (it was named the world’s best Fair Trade red wine in a British competition) and makes me optimistic about this class of “ethical consumption” goods.

[The image at right is the label of a Fair Trade sacramental wine from Chile that is marketed to Catholic churches for Communion use– can you get more “ethical consumption” than that? Nice idea — but 15% alcohol? Wow! Better keep an eye on those altar boys.]

Leigh Barrick, a student in the wine and society class I taught last semester, wrote a paper arguing that Fair Trade wine may be an especially good candidate for success because many wine consumers are actually interested in the details of production and not just the final product. If you don’t know or don’t care about who made what’s in your glass and how then ethical issues such as how much small growers are paid or how the environment is affected are difficult to motivate.

Wine is one of the few products we buy where we can frequently find the answers to who/what/when/where/how and why right on the label or on the promotional “shelf-talker.” Wine is good, I tell my friends, but wine and a story is much better and a Fair Trade or sustainability story makes the wine experience more satisfying for many people.

A Fly in the Ointment

But Fair Trade is not a panacea. Leigh argued, based upon her prior research into Fair Trade coffee programs, that there are many hurdles in the path of Fair Trade wine’s success. One issue that I have been thinking about recently is the role that grower cooperatives play in Fair Trade programs.

Cooperatives have a generally poor reputation in the wine industry. When I think of cooperatives the first thing that comes to my mind are those famously bad wines from poorly run cooperatives in the South of France. You know the ones I’m talking about, the cooperatives where growers are paid by the ton pretty much regardless of the quality of the grapes they bring in. The resulting wines are often thin, acid and tannic. These cooperatives are a classic example of the Prisoners’ Dilemma, where collective interest and individual interests are at cross purposes.

The collective interest of the cooperative members is of course to produce good quality wine at a competitive price so that their “brand” (which may be just the village or region AOC classification) has some value and they can earn a decent living. If the vineyards were owned and run by a single owner, with a specific interest in the brand, chances are that yields would be lower and quality would be the focus.

But, given that they are paid by the ton, each individual winegrower has a strong incentive to maximize yield. Quality generally suffers. Any individual grower who sacrificed quantity for quality would get lower income without significantly affecting the quality of the wine, since all the grapes dumped in the same press in a worse-case-scenario cooperative. As each grower responds logically to individual incentives, wine quality falls and the collective interest suffers. Europe’s lake of unsellable plonk is often blamed on the poor wines that this fouled-up incentive structure spews out.

Wait — It Get’s Worse

This image of wine cooperatives is enough to make you lose hope for Fair Trade wines, since they are typically made using arrangements centered on grower cooperatives (which act to distribute the higher payments and coordinate the communal investments that are the whole point of Fair Trade programs). If you need grower cooperatives to make Fair Trade wine work, and if cooperatives make lousy wine because of their incentive structures, then the future of Fair Trade wine looks pretty grim.

The story gets worse when you look at French wine history. French wine cooperatives were created to be Fair Trade organizations (although no one thought to call them that). As France industrialized and urbanized a hundred years ago, wine market power shifted from the growers, who owned the vineyards, to the distributors and negoçiants, who controlled access to the big markets.

Negoçiants had what economists call monopsony power. A monopolist is the only seller of a product and so can drive price up. A monopsonist is the only buyer and so can push price down. If the big negoçiant wouldn’t buy your just-picked grapes you were sunk, so growers were coerced (or felt coerced) into selling their grapes or wine for rock bottom prices. The negoçiants held the power because they could always buy grapes from your neighbor or the growers in the next village, but you had few options. Putting all your grapes back in the cart and shopping around for higher prices from another buyer in another town was not a very attractive alternative to taking whatever the negoçiant was willing to pay.

Will History Repeat?

Grower cooperatives were created to give growers protection from this cut-throat competition and to allow them to capture a larger share of the value of their production by banding together to negotiate a fairer collective price. This sounds a lot like the motivation behind today’s Fair Trade groups. And it worked, too, according to the evidence I’ve seen, at least for a while. But then the Prisoners’ Dilemma problem appeared and quality went down the drain. Or at least that’s how the story is usually told.

Will today’s Fair Trade cooperatives suffer the same fate as their antecedents in the South of France and elsewhere in Europe? Perhaps. But there is reason to think the Fair Trade wine story might have a happier ending. Watch for my next post on this topic.

Wine, Recession and the Aldi Effect

January 13, 2009 By Mike Veseth in Aldi, Economic impact, globalization, Supply and Demand, wine bargains, wine markets, wine price 4 Comments

Aldi stores are about to expand in the United States, drawn here by the recession according to an article in today’s Wall Street Journal ( “Aldi Looks to US for Growth” ). I wonder how this will affect the wine market?

A Tough Nut to Crack

Aldi is a German “hard discount” store chain. A “hard discounter” sells a limited selection of house-brand goods at very low prices in small, bare-bones outlets.

Hard discounters are a niche, albeit a growing one, in the U.S. Wal-Mart is a successful discounter, of course, but not a hard discounter because it still features many mainstream branded products, its prices are higher and its stores a bit more plush. Aldi and other hard discount stores drove Wal-Mart out of Germany, according to the WSJ article, but the U.S. market has been a tough nut for the hard discounters to crack. American consumers are primed to buy brand-named products and they like lots of choice, marketing experts say, and so tend to resist the house brands that hard discounters feature, which has limited their penetration here.

Germans are more willing to sacrifice brand names for low prices, apparently. Aldi and other hard discounters are dominant powers in German retailing. The WSJ reports that 90% of German households shop at Aldi stores and 40% of all grocery purchases are made in hard discount outlets.

Divide and Conquer

Interestingly, there are actually two Aldi store chains in Germany (with similar but different logos — see illustration above). Aldi is short for ALbrecht DIscount. The Albrecht brothers who founded the company after World War II fell out over the issue of tobacco sales in their stores. They divided the German market between them (Aldi Nord and Aldi Süd) and then, eventually, split up the world market too. Here are links to Aldi USA and Aldi International websites if you want to learn more about this retailer’s local presence and international reach.

Aldi Süd has been in the United States since the 1970s. The corporate website tells the story this way.

The ALDI way of shopping has been continuously honed and refined since our first store opened in Southeastern Iowa in 1976. Committed to bringing food to customers at the lowest prices possible, our early stores set up shop in small spaces and introduced shoppers to the limited-assortment concept, carrying only 500 private-label items. Compared with other supermarkets, our stores seemed tiny. But ALDI found a niche with Americans hungry for real value, and the chain grew rapidly.

Over time, more products were added, including more refrigerated and frozen foods. ALDI also began experimenting with Special Purchase items, to great success. More recently, Sunday hours were instituted, and ALDI began accepting debit cards.

Today, there are nearly 1,000 ALDIstores in 29 states, from Kansas to the East Coast. And today’s ALDI store carries about 1,400 regularly-stocked items, including fresh meat, and, in certain locations, beer and wine. Though the original ALDI concept has been modified somewhat to accommodate our ever-changing tastes and preferences, the core concept remains: “Incredible Value Every Day.”

The German origins of the store are apparent in this description, from the traditional Sunday closing to the very limited selection. Your local upscale supermarket carries at least 10 times as many products as a typical Aldi.

Wine is an important product in Aldi’s German stores, as you can see from the wine selections featured on their website. I believe that Aldi is the largest single retailer of wine in Germany.

Since Germans are rich and Germany makes great wines, you would think that Aldi must sell mainly fine wines, but you would be wrong. Aldi’s median German wine sale is red not white, imported from a low cost producer, sold under a house-brand name, packaged in a box or TetraPak and priced at around one euro per liter.

You could say that it is Two Buck Chuck (TBC) wine, but in fact TBC is more expensive. TBC is to Aldi wine as Wal-mart is to Aldi itself. (Note: Wal-Mart now has its own brand of two dollar wine, which makes this comparison even more appropriate. It is called Oak Leaf Vineyards and is made for Wal-Mart by The Wine Group.)

The Aldi Effect

Aldi figures that the recession is its moment to press more vigorously for U.S. market share. Data indicate that consumers are much more cautious now, so perhaps they won’t be so picky about brand names and will, like their German cousins, be willing to trade down for a lower price. The Financial Times reports that Aldi sales in Great Britain are up 25 percent! Aldi plans to speed up store openings in the U.S. and to expand into New York City. New York! If you can make it there … well, you know.

This may be Aldi’s opportunity in wine, too. Most but not all Aldi stores in the U.S. (damn U.S. liquor laws!) sell beer and wine. Aldi’s U.S. website boasts that

ALDI believes that life’s little pleasures should be affordable for everyone. In many of the countries where ALDI calls “home,” we’re known for exceptional values in wine and beer. And now, we’re bringing that tradition to the United States.

Thanks to our global reach, we’re able to partner with winemakers and brewers around the world, to bring you exceptional beers and wines at remarkably modest prices.

Our wines come from all of the world’s best wine producing regions: Germany, France, Spain, California, Argentina, and Australia. Our beers are sourced from Holland, Germany, and Latin America. Some carry our private labels, others carry the labels they wear in their native lands—but all are exclusively ours in the U.S. So now you can raise a glass to “Incredible Value Every Day.”

The good news here is that Aldi’s U.S. push may also help drive wine deeper into the U.S. consumer mainstream. You can say all you like about the quality of Two Buck Chuck but it sure did help expand the wine culture in the U.S. and some (but not all) my TBC-drinking friends have moved upmarket for at least some of their purchases. The wine may not be very good (a matter of taste), but its market impact has not been all bad.

Will Aldi Succeed?

Will Aldi’s drive be successful? There is reason to think it will be. They seem committed to tailoring their hard discount operations to local market conditions, which is important because markets have terroir as much as wine.

But there is a more important reason. Both German Aldi chains are present in the U.S. now, although you are probably not aware of them. Aldi Süd operates on under the Aldi name, of course, with the same logo as in Germany. The owners of Aldi Nord invested years ago in a different chain, based in California and intentionally tailored for thrifty but upwardly mobile U.S. consumers. It’s an upscale Aldi Nord and it has been very successful here.

Perhaps you’ve heard of them. They have limited selection, smaller stores, lots of house brands, and low prices. They even sell a lot of wine. The name?

Oh, yes. Trader Joe’s!

Book Review: The Business of Wine

January 4, 2009 By Mike Veseth in book reviews, Supply and Demand, wine brands, wine markets, wine research Leave a comment

The Business of Wine: A Global Perspective by Per V. Jenster, David E. Smith, Darryl J. Mitry and Lars V. Jenster. Copenhagen Business School Press, 2008.

The Business of Wine is an ambitious little book. It aims to provide a streamlined introduction to the global wine busness, which is a lot to try to cover in just 198 pages. The result is necessarily a bit uneven but still quite useful.

This is a useful introduction, especially good for students, but not a book to give to your Master of Wine colleagues. If you are an expert on the French wine industry or wine market, for example, you will probably bemoan the lack of depth found here. But if you know little or nothing about the topic, you will probably think this a good place to start.

A survey of the winegrowing sectors of the major world wine nations takes up about a quarter of the pages and this is probably the most uneven part of the book. This is understandable, I think, because there is just so much information that could be included and so little space to hold it, so the choice of what to say and what to omit is very arbitrary. The result is necessarily a bit superficial, but still useful. Consult your Oxford Companion to Wine for fuller detail.

My favorite chapters were more narrowly focused and thus able to provide more depth. Chapter 6 on the History and Development of the Distribution System includes a very interesting analysis of the evolution of wine distribution channels within Europe and the shift of power from producers to distributors and then to supermarkets, which have exploited their position by building backward product chain linkag

Chapter 8 on wine company strategies is also noteworthy — this time for its effective use of brief but informative case studies to show how wine companies in different market segments have developed particular strategies. Company profiles include Gallo, LVMH, Foster’s, Freixenet and Chateau Margaux. Some of the information is already a bit dated, which is understandable because the wine business is so dynamic, but the analytical points are still useful.

The Business of Wine is very readable overall, although it would benefit from more thorough copyediting, both to catch typographical errors and to make sure that the tables are all clearly explained. The lack of an index is unfortunate since this limits the book’s utilityas a reference volume, especially for students

Note: Thanks to Francine Graf for bringing this book to my attention.

Fair Trade Wine

January 1, 2009 By Mike Veseth in Argentina, Fair Trade wine, globalization, Sam's Club, sustainability, wine awards 1 Comment

p11802461 A Sam’s Club purchase provokes some thoughts on a new wine movement.

The Economics of Ethical Consumption

Fair Trade products attempt to use globalization to offset some of the negative potential effects of globalization. Global market forces can sometimes lead to the exploitation of natural resources and unskilled labor, for example. The “sympathy” that Adam Smith thought would condition market relations breaks down when producer and consumer are separated by thousands of miles and multiple commodity chain links.

Fair Trade products and other ethical consumption goods seek to create a global market for products that provide more benefits to those at the first stages of the global product chain. Some consumers are willing to pay a bit more for such products once they are aware of the problem and even a small slice of a global market can have real economic clout. Global markets for ethical good thus have the potential to offset somewhat any “race to the bottom” forces and to educate consumers in the bargain. You have almost certainly seen Fair Trade coffee and I think Fair Trade chocolates are pretty widely available, too. Look for Fair Trade roses on Valentine’s Day.

Enter Wal-Mart

Sam’s Club, the membership warehouse store arm of Wal-Mart, is currently selling a Fair Trade wine called Neu Direction. It is a 2005 Malbec from Argentina and I think it illustrates the potential of Fair Trade. It is a very nice wine, much more interesting than its $9.99 price tag would lead you to believe. It was judged the best Fair Trade certified red wine at a competition organized by The Independent of London in February 2008. Sam’s Club is the exclusive U.S. distributor.

According to their website,

Neu Direction Malbec benefits the local farmers of Viña de la Solidaridad (Vine of Solidarity), an association based on preserving the rich, cultural heritage of the contratista-landowner relationship. Ten small vineyard owners and nine contratistas make up the association. The contratistas lives on the land with their families and are paid a percentage of the grape harvest by the vineyard owners. The association currently owns 200 acres of vineyards with about a third certified organic, with plans to convert more over the coming years.

The association members receive a guaranteed minimum payment for their grapes and revenues are also channeled to community development projects such as schools. 2008 was the first year of the U.S. Fair Trade wine certification program, which is administered by a NGO called TransFair.

Neu Direction makes the positive case for Fair Trade wine very well. It is, first of all, an excellent wine at a good price and so can attract buyers on these merits alone. It is distributed in about 450 Sam’s Clubs across the U.S. and benefits from the built-in market that Sam’s Club members represent. Sam’s Club (and Wal-Mart) gains in some small way through its association with “ethical” productions (Fair Trade, sustainable and organic products) and so has a reason to promote them.

Leigh Barrick, one of my students who has studied both Fair Trade coffee and Fair Trade wine, argues that wine may be well suited to Fair Trade markets because consumers are often better informed and more interested in the origins of and production conditions associated with wine than for most other consumer goods. Wine enthusiasts are thirsty for information about where wines come from, who made them and how. Fair Trade provides this information in a way that informs, educates and potentially produces social and economic change. A good fit, Leigh says, and I agree.

A Case of Trade-offs

But Fair Trade wines aren’t automatically going to be winners. First, not every Fair Trade wine is likely to be as good or as inexpensive as Neu Direction – or to have the Wal-Mart distribution system behind it. More important, however, the Fair Trade system itself is full of trade-offs.

Fair Trade certification is necessary, it seems, to prevent the designation from being exploited or debased. But certification is often expensive and time consuming (this problem applies to organic or biodynamic certification processes, too) so many small producers may be unable to bear the cost. The benefits of Fair Trade wine are therefore likely to be unevenly distributed and may required financial sacrifice in the short run to achieve gain in the long run.

That’s not to say that Fair Trade isn’ta positive force, just that it is not a panacea. It is just one new direction — a progressive one– among many in the world of wine today.

Photo by Michael Morrell, my chief inexpensive wine research assistant.We’d like to thank Michael and Nancy for their hospitality during our stay with them in Tucson.