How will the Economic Crisis affect Wine?

October 4, 2008 By Mike Veseth in Economic impact, Supply and Demand, wine bargains, wine markets, wine tourism 7 Comments

Some people think that wine is recession proof. They’re wrong.

Demand and Supply

The still evolving economic crisis is already having serious impacts on the wine industry. Although some segments of the industry are gaining as a result of the collapsing credit markets and contracting real economy, there are a lot of losers, too. Herewith a brief report compiled from a variety of published and industry-insider sources.

In the short term the problem is all about falling and shifting demand. In the longer run, the supply effects of the financial crisis need to be considered.

The hospitality industry is a bellwether of the overall economy — restaurant meals and hotel stays are some of the first things to be sacrificed when people and businesses are uncertain about the future. It is no surprise, therefore, that restaurant wine sales are down, apparently a reflection both of fewer customers and smaller tabs (wine tourism is falling, too, although high gas prices are part of that story). This is already affecting both wineries who target restaurant sales and restaurants that have invested in high-margin wine programs in the last year to try to compensate for soaring food costs. The squeeze is on, as I wrote in March, and getting worse.

The evidence I’ve seen concerning supermarket and wine store sales suggests that buyers are trading down. The $10 and up market segment has been the fastest growing part of the Wine Wall in the last two years. It’s still expanding, but the pace of growth has slowed considerably and there is evidence that buyers are trading down within it. An article in today’s New York Times suggests that even very affluent buyers are being more cautious.

Low cost wines ($4 and less) are seeing a surge in sales. This has apparently created something of a crisis in Great Britain that pits the big retailers (the supermarket chains) versus the big producers (the global wine companies like Constellation Brands) in a battle for control of the Wine Wall. The producers see their long term future in upmarket wines and have worked hard to reposition themselves in at the top of the Wine Wall. They are very much committed to this strategy. The retailers, however, are focused on value wines. They see a real short term threat in discount store competitors. They need to stress value and lower price, on the Wine Wall and throughout their stores, they believe, to keep their customers from switching to Aldi-class hard discount outlets.

There is a lot of turbulence in the middle of the Wine Wall ($4-$10), which is the heart of the market in some respects. Microdata harvested from grocery store loyalty card programs suggests that buyers really are trading down from $7.99 to $5.99, for example. Since the cost of making the distributing a $5.99 wine is not $2 less than a $7.99 wine, trading down has a big effect on producer and retailer profits. Wine may be recession proof if you look only at overall volumes, which have held up pretty well for the industry as a whole, but don’t expect revenues and profits to tell the same sanguine story.

Not everyone will lose from this trend, of course, as there are many wines that are positioned to appeal to value-conscious buyers. But the upmarket strategy that so many winemakers have embraced, and which I still believe is wise for the long run, is taking a short term hit. And the effects on the wine industry may be especially large because some of the key regional wine markets are also the areas that have been most affected by the mortgage crisis and will be heavily hit by credit tightening.

Credit Crisis Effects

Most industry people I’ve talked with are focused on the short run impact of the recession on wine demand, and that makes sense. Making wine is all about long term decisions and relationships, but making a living from wine means holding onto buyers now. But I think there will be longer term supply effects that should be considered because this economic downturn isn’t just a recession, it is also a credit crisis.

Even if the Treasury rescue plan is a success, I still believe that credit will be much tighter for the next three years (some of my colleagues think it will take even longer to work though the credit cycle). This will have serious effects because so much of the real economy has become dependent upon ready credit to finance business operations and to fund customer purchases. Winegrowers are obvious potential victims of this trend. Winegrowing is a risky business with special credit needs and an overall credit freeze could have serious effects that may extend all the way from the price and availability of the grapes themselves to the value of vineyard properties. Retailers and distributors may also need to scale back their operations to match their reduced access to credit.

The big global wine companies may be affected, too. Anyone who follows the business has noticed that the big corporations are all trying to reconfigure themselves around particular market strategies. Constellation is moving upmarket and shedding downmarket wine units while others are refocusing on particular parts of the Wine Wall. A credit squeeze will both change the logic of some of these investments and make funding of sales and purchases more difficult.

Finally, the credit squeeze is affecting foreign exchange rates and this means that producers around the globe, who may or may not be affected directly by the crisis, will inevitably suffer indirect effects. The dollar has appreciated rapidly against many currencies in recent weeks (the Euro’s cost has fallen from $1.44 to $1.38 is just the last few days, for example) as international investors have sought a save haven for their capital until the international effects of the crisis become clearer. This exchange rate effect will work against those US producers who hoped to increase sales abroad and benefit European exports here.

There will be a lot of economic turbulence from shifting demand and supply before we come out of this crisis. Buckle your seat belts. We’re in for a bumpy ride.

The Bottle Shock Effect

September 30, 2008 By Mike Veseth in critics, Economic impact, Sideways, Wine Competitions, wine critics 1 Comment

First Sideways, then Bridget Jones. Now Bottle Shock. How will the new film about the 1976 Paris tastings affect the wine market?

The Sideways Effect

Sideways (a 2004 film by Alexander Payne) is famous for helping to provoke a global Pinot Noir boom. A soliloquy (see below) on the thoughtful, fragile glories of Pinot spoken by an equally thoughtful, fragile character named Miles was enough to get thousands of wine enthusiasts to set aside their usual glass of Merlot and pull the cork on a bottle of Pinot Noir.

“Um, it’s a hard grape to grow … it’s thin-skinned, temperamental, ripens early … it’s not a survivor like Cabernet, which can just grow anywhere and thrive even when it’s neglected. No, Pinot needs constant care and attention … it can only grow in these really specific, little, tucked- away corners of the world. And only the most patient and nurturing of growers can do it, really. Only somebody who really takes the time to understand Pinot’s potential can then coax it into its fullest expression.”

Movie messages matter when it comes to wine, I guess. This conclusion was recently reinforced by the Bridget Jones effect, noted in Britain, where the film character’s tendency to drown her sorrows in glasses of Aussie Chardonnay caused the market for these wines to tank. Apparently wine drinkers want to be thoughtful and fragile (Pinot) not pathetic (Chardonnay) and movies are where they pick up their cues. Who knew?

This makes me wonder how a new film called Bottle Shock will affect the wine market. Bottle Shock is loosely based on Steven Spurrier’s famous 1976 Paris tasting of French and California wines, which George M. Taber wrote about so well in his book The Judgment of Paris. Napa Valley wines (Chateau Montelena Chardonnay and Stag’s Leap Cabernet Sauvignon) were top rated at the tasting and this surprising result is said to have put California wine on the map. It is interesting to speculate if Bottle Shock will have as much influence as Sideways.

Bottle Schlock

I have my doubts. Sideways was actually a pretty good movie (not that I am qualified to judge) whereas Bottle Shock strikes me as a less serious effort. A fruit bomb of a movie, if you know what I mean, but not a lot of depth or complexity. It is Merlot to Sideways‘ Pinot Noir.

Alan Rickman is funny in a sort of Terry-Thomas way as Spurrier, but the two main male characters seem to be slightly modified younger versions of the Sideways cast – one is an oversexed surfer dude with a good heart while the other is, well, fragile and thoughtful. Do you see the resemblance? The female love interest is obviously a younger version of the Sideways Maya character. Not much character development here and many of the plot elements are predictable and cartoonish. This is not necessarily a barrier to commercial success, however.

The movie says that it is based upon a real story (the one that Taber covered for Time magazine), but it takes incredible liberties with the facts. Most of the nouns (people, places, things) are wrong in some way although some of the numbers are correct (1976 – check – got the right year).

Chateau Montelena’s winemaker, Mike Grgich, is left out entirely even though he is a central figure in the true story. Warren Winiarski, the winemaker at Stag’s Leap, is nearly as invisible. I feel sorry for others, like George Taber and Paul Draper (who made the Ridge Monte Bello), who appear only as crude caricatures. Artistic license, I suppose.

Perhaps the biggest error is the most basic: who won? Although California wines came out on top in both red and white competitions, they also came dead last (see the actual rankings and judges’ scores at right). In fact the bottom two Chardonnays were from California (Veedercrest and David Bruce) as were the four (out of 10) bottom Cabs (Heitz, Clos du Val, Mayacamas and Freemark Abbey).

If the Paris tasting was judged as a team competition, France versus California, rather than a rating of individual wines, I think you might reasonably conclude that the whites were a dead heat while the French won the battle for the reds, depending upon how you calculated the team scores. As you can see here, however, the variations among the judges was almost as great as among the wines, so clear winners and losers are difficult to determine. Toss out a couple of judges or bring in some new ones and the rankings could change quite a bit.

The movie didn’t do anything to correct the record in this regard, but that would be asking too much of a simple film. Instead it concludes with the Spurrier character’s prediction (with 20/20 foresight) that soon we’d be drinking wines from all over the world, Australia, New Zealand, South America, South Africa and so on. So globalization was the real winner of the competition.

The Bottle Shock Effect?

It is unclear as yet if there will be a Bottle Shock effect in the wine market of any kind, but if there is, what will it be?

One thing that we can predict is that the specific wines featured in the film will experience a boom. This means Chateau Montelena more than any other wine because it is the focus of the film. It is hard to say if this effect will extend to the other Paris tasting wines or to quality California wines more generally. A local wine shop organized a tasting of recent releases of all the California wines in the 1976 competition in celebration of the film, so perhaps Bottle Shock will encourage events like this on various scales and have a broader effect. Even so, the world of quality California wine extends far beyond the few wines that went to Paris thirty years ago.

Perhaps the best possible result would be if Bottle Shock somehow helped demystify wine, taking it out of the hands of the critics, who do so badly in the film story, and empowering ordinary people to trust their own tastes. That would make Bottle Shock a really useful film.

But I doubt it will happen — it is hard to break away from our acquired dependency on wine critics. We tasted the famous California wines “blind” at the Bottle Shock event I attended, for example, which naturally encourages you to think for yourself (a good thing, even if it isn’t my favorite way to taste wine). But we were also given a set of “expert” tasting notes and challenged to smell and taste the same things the critics did, (as a way to identify wines none of us had previously tasted), which kind of defeats the purpose.

Mark Twain warned his readers to think for themselves and not to get “drunk on the smell of another man’s cork.” It seems to me that’s the most important message of Bottle Shock. I hope it gets through.

Indian Tariffs and Vino Exceptionalism

September 23, 2008 By Mike Veseth in India, trade policy Leave a comment

A recent book review and an article in today’s Financial Times provoke a short essay on wine exceptionalism.

Bad Samaratans

Choice magazine, a publication of the Americal Library Association, recently asked me to review a book called Bad Samaratans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang of the University of Cambridge. I was happy to do this and gave the book a generally favorable review because the message is a useful one that I have written about in the past.

The advocates of hyper-globalization often tout totally free markets as the only way forward, but the “secret history of capitalism,” as Professor Chang calls it, is that there are plenty of examples of countries that only advanced when they adopted protective measures that gave domestic firms room to grow. This lesson goes back as far as Alexander Hamilton in the United States, Friedrich List in Europe (and so is not really a secret) and lives today in the economic miracles of Japan and Korea. This doesn’t mean that protectionism is always good, only that is is not always bad. Life is complicated. Deal with it.

I think this view is true in general, but is it also true about wine? Or is there such a thing as wine exceptionalism? An article in today’s Financial Times makes we wonder.

Indian Wine Tariffs

The article reports on a dispute between the European Union and India that is apparently headed to the World Trade Organization. The issue is Indian wine tariffs. India has tariffs on imported wine and high taxes on domestic products, which is perhaps not unexpected, given India’s low per capita income. You might expect a country like India to impose high excise taxes on luxury goods as a way of funding needed government programs. I imagine that wine is a luxury for most Indian households, so a high tariff would be a way of taxing the affluent to benefit the poor. Wine consumption is very low in India (5 million liters per year, which is practically zero per capita, given India’s huge population) and the high tax is one reason for this.

But the India market is growing, expected to double in the next two years, so there is something at stake here. More to the point, however, the Indian taxes are not for revenue only — some are intended to protect the nascent Indian wine industry. That’s the rub.

WTO rules allow countries to have tariffs, but require that they satisfy a “national treatment” rule. This means that, once foreign products have entered the country and paid the duty, they must be taxed and regulated just like domestic goods. This is where India has run afoul of the WTO.

According to the Financial Times article, three Indian states, Goa, Maharashtra and Tamil Nadu, which represent important potential import wine markets, impose additional discriminatory domestic taxes on foreign wines, while exempting domestic wines to try to encourage the growth of the industry. The FT reports that

India imposes customs duties of up to 150 per cent on bottled wines and spirits at the border. These are supposed to be equivalent to the excise duties paid by domestic producers.

But the EU says Maharashtra is imposing a special fee on imported wines and exempting local producers of wines and spirits from excise duty. Goa and Tamil Nadu are charging extra import fees while Tamil Nadu continues to operate restrictions on the sale of imports.

This is contrary to WTO rules, if the accusations are true, and hence bad trade policy. But is it good economic development policy? That is, is it a good idea way to build the Indian wine sector? Or is wine different?

Vino Exceptionalism

I have to admit that my answer is, no! I have studied a lot of countries that have chosen to try to protect their domestic wine industry from foreign competition and I am not aware of a single case — not one — where it was effective. Captive markets (in wine if not more generally — sorry Prof. Chang) seem to breed what Albert O. Hirschman used to call “lazy monopolists.” The wines they produce are easy money — made to appeal to a least common denominator market and quality products are neglected in a sort of tragedy of the vineyard commons.

Quality wine emerged only when competition was introduced. This was true for Argentina, Canada, New Zealand, Washington State and now, I believe, in Languedoc in the South of France, although it is still too soon to tell how EU market reforms will work there. If vino exceptionalism holds for India, then I suspect that their protective policies will not benefit them much. Indian wine drinkers may thank the EU in the short run for its vigorous prosecution of WTO rules. Indian wine producers may also thank them in the long run for forcing them to focus on quality in order to compete with imports.

Wine Critics and their Discontents

September 7, 2008 By Mike Veseth in decanter, robert parker, wine critics, wine spectator 1 Comment

The Principal-Agent Problem

You might think that the job of wine critic would be heavenly – traveling the world, tasting wines and talking and writing about them. What could be better? But there are downsides and trade-offs to the job. One is that your credibility depends upon objectivity – if your ratings are thought to be biased, your advice is correspondingly discounted. But, on the other hand, you need income to work as a critic or to publish magazines and websites and the most obvious source of income is the wine industry itself. How can we trust wine critics when the potential conflicts of interest are so obvious?

This situation is not at all unlike that faced by candidates for political office, who receive money from “special interests” but still need to serve (and appear to serve) the general interest. It isn’t impossible to walk this tightrope, but it isn’t always easy either. You probably can think of many politicians who have done it successfully and a few who fell off.

In economics we see this as an example of the principal-agent problem. You understand the principal-agent problem if you’ve ever wondered if the cab driver was really taking the shortest route back to the hotel. Although cab driver and rider have entered into a mutually advantageous contract, interests are not fully aligned and the fact of asymmetric information means you may not be sure that you are getting a fair deal.

Wine enthusiasts (the principals) hire critics (the agents) to give us objective advice, but we know that the critics may have their own interests as well as ours in mind. How can we trust them to place our interests above their own?

It seems to me that all the wine critics I have surveyed confront this problem openly and honestly, although they arrive at different strategies to deal with the problem. All the examples I will cite below are effective, in my view, so I have come away from this little study well satisfied, but the fact that they are so different can create some confusion for wine enthusiasts who fail to read the fine print.

Parker and Vaynerchuck

Robert Parker’s solution to the problem of potential economic conflict of interest at the Wine Advocate is simply to refuse all advertising and to charge his principals fees for web access, hard copy subscriptions, books and so forth. Who does Parker work for? He works for us. It is pretty hard to criticize this model, although interestingly he is probably the most criticized wine critic. People don’t complain about economic conflict of interest, however, but rather that Parker’s particular idea of wine favors particular styles of wine and particular producers.

Gary Vaynerchuck at Wine Library TV takes a different approach. His family owns a major wine retailer in New Jersey, so in fact he has a very direct financial interest in the sales of some of the wine he reviews. Rather than trying to build a firewall between the wine critic business and the wine retailer business, however, he tries to be completely transparent about it and to accentuate his personal credibility as an objective reviewer. Unexpectedly, this seems to work. Reputation matters. Accepting the conflict of interest and being open about it is a risky strategy, but Gary pulls it off.

There was one case of a potential conflict of interest a few months ago that shows that he is not unaware of the risks. The top wine in a particular tasting turned out to be a proprietary label of Gary’s store. Apparently Gary didn’t know this when the tasting was recorded and when he found out he immediately took the video down from the internet so that he could not gain financially from his honest appraisal of the wines. We only know about it now because of his online apology and explanation. I think this case shows just how very important it is to wine critics to maintain their reputations as honest objective agents.

Worth a Thousand Words

I’ve been studying how wine magazines handle reviews and the images that sometimes appear with them because it seems to me that a review that is shown along with a photo of the bottle or label is a lot more memorable than the plain text, so the choice of which wines to favor with an image is important.. Some of the magazines use these images to generate advertising revenue, others do not. This is potentially confusing for readers who may mix up editorial content (the review) with paid advertising (the label image).

Britain’s Decanter magazine keeps its paid advertising and editorial wine ratings reasonably separated. The top rated four- and five-star wines are featured with bottle photographs while the rest (three stars and below) have simple text listings. It is clear that the photos reflect editorial evaluation. Advertising pages bookend each set of ratings, but they are labeled “Decanter Promotion” so it is pretty clear that the wineries have paid for the space.

Wine & Spirits magazine has a different system (clearly explained in each issue). After it has rated a group of wines it invites the wineries to purchase feature space in the form of wine label images that are included with the relevant reviews. You might assume that the editors picked the wines to receive more attention this way, but you are wrong — stop assuming! The label images are product placements and I appreciate Wine & Spirits’ honesty in revealing it.

Wine Enthusiast has a similar policy according to the explanation I found on page 182 of the September 2008 issue. All the rated wines appear in long unadorned columns of reviews, but some wines also show up along with label images in the colorful pages that precede the main review text. Some of these are top-rated wines, but others are not. Like Wine & Spirits, producers are invited to buy image space in this section of the magazine, but only after the wines have been rated so that it is clear that they are buying the image space not the review — a good policy.

Wine Spectator doesn’t sell image space. There are highlighted pages of wine reviews with labels at the front of the ratings sections, but these are editorial endorsements rather than paid placements. Otherwise all the listings get equal treatment in the magazine.

Mixed Messages

If you see a bottle or label image alongside a review in Wine Spectator or Decanter, it means that the editors recommend the wine. Label/review combinations in Wine Enthusiast and Wine & Spirits are product placements. Each publication is very clear about this to protect its reputation – and I believe them when they say that their reviews are not influenced by advertising. But the fact that there is more than one system means that readers of Wine Enthusiast and Wine & Spirits and other magazines with similar practices may sometimes confuse paid product placement with editorial endorsement.

Solution? I think all the critics cited above are honest agents and they have the right to choose different strategies to protect their reputations while generating needed revenues. The burden falls on us, the wine buying “principals,” to understand what sort of “contract” we have with our critic “agents” so that we know when we are viewing paid product placements.

The Wine Spectator Award Hoax

September 4, 2008 By Mike Veseth in wine awards, Wine Competitions, wine critics, wine magazines, wine spectator 3 Comments

It has been a couple of weeks now since the Wine Spectator hoax hit the news. Robin Goldstein (a.k.a. fearlesscritic.com) “blew the whistle” on Wine Spectator in a session that I happened to chair at the American Association of Wine Economists meetings in Portland. (Robin actually revealed his hoax as an unscheduled prelude to a completely different presentation at the meetings.)

The wine media quickly picked up the story and now it is everywhere. The story has generated a certain amount of embarrassment for Wine Spectator and given Robin and his new book a lot of publicity.

What Robin did was to create a fake Italian restaurant (Osteria L’Intrepido di Milano) along with a made-up menu and wine list. Then, following directions on the Wine Spectator website, he applied for an Award of Excellence, which is the way that Wine Spectator recognizes and encourages restaurants with strong wine programs. Wine Spectator tried but was not able independently to confirm the facts about the fake restaurant; they took the application on trust as an honest entry and presented it with the appropriate award in the August 31, 2008 special restaurant issue (see page 181). You can read all about it on Robin’s website for the fake restaurant, http://osterialintrepido.wordpress.com/

Where is the Outrage?

How upset should we be to discover that Wine Spectator can be tricked into giving its wine award to a fake restaurant? Michael Morrell, my chief cheap wine research assistant, was outraged. Although price is the most important factor for him in choosing wine, he admits that he is also influenced by wine ratings. The award hoax undermines his trust in wine critics in general and the ratings and advice they produce.

I can understand Michael’s concern, so I consider this a very serious matter, but I don’t think the fact that Wine Spectator fell for a hoax is reason for us to doubt its integrity. Here is my report.

The Wine Spectator Award of Excellence is given to restaurants to recognize their wine programs. Although the actual criteria for receiving an award seem very modest to me (you can read them on page 97 of the special restaurant wine issue), it is a fact that about 30% of the new entries each year fail to meet them (the success rate is obviously higher for establishments who enter and receive an award year after year).

There are three levels of award. 3254 restaurants received the base level recommendation. 802 second tier “Best of Award” ratings were given to restaurants with more comprehensive wine lists. 73 top of the line “Grand Awards” were bestowed. The people at Wine Spectator are proud of their award program and believe that it has encouraged restaurants to upgrade their wine programs.

Caution: Economics Content

I’m sure this is true, but I tend to view the matter in economic theory terms. Consumers have lots of restaurant options and are uncertain which ones might have good wine choices. The restaurants know how good their wine selections are but have trouble effectively communicating this to potential customers. This is the classic economic problem of “asymmetric information” and the classic economic solution is “signaling” – where one side of a potential transaction finds a way to reveal key information to the other side to help seal the deal.

Restaurants that want to attract wine enthusiast customers need a way to “signal” them about their wine programs and the Award of Excellence is one way to do this. Restaurants that think sending this signal is worth meeting the criteria and paying the entry fee do it and get on the list. Others, even some that have strong wine programs, don’t bother. They have other ways to send the message, I guess.

Wine Spectator fell for the Osteria L’Intrepido hoax because it relied upon the honesty of applicants, assuming, I suppose, that no one would go to the trouble and expense of applying without a conventional commercial purpose. This is another side of asymmetric information — Robin presumably knew his motives in setting the fake restaurant “sting” and Wine Spectator could only guess or assume.

In Vino Veritas

Truth is especially important in the wine world and, because of the problem of asymmetric information, it is particular difficult to know with confidence. We depend upon the honesty of self-interested actors and the truthfulness of their signals. When we read wine ratings or see wine competition awards, for example, we assume that the judges and critics are tasting the same wines that we buy in the market. But it would be easy for a dishonest producer or distributor to put special wines in the bottles sent to the critics or wine award competitions. The easiest switch would be to put some of last year’s highly ranked wine in place of this year’s weak effort. Most wine critics rate products that are sent to them by makers and distributors and rely upon the honesty of the sender. Only a few – Gaiter and Brecher at the Wall Street Journal come to mind – seek out and purchase their wines through normal retail channels.

Doctored “critic cuvee” wines are a potential hoax problem. I am not aware of any wine publications that have been hoaxed in this manner, but I have read and heard speculation about special “award cuvee” wines being entered in competitions. The nature of the situation makes us all vulnerable to hoaxes.

Wine Spectator fell for this hoax but it wasn’t because its editors are dishonest in giving their awards. I think most of the criticism of Wine Spectator in this situation is a bum rap, especially since the magazine’s editors seem to be unusually careful in avoiding advertising conflicts of interest. That’s the subject of my next post.

The Two Faces of French Wine

August 27, 2008 By Mike Veseth in book reviews, wine markets Leave a comment

A new book by Jean-Robert Pitte provokes a reconsideration of wine stereotypes.

It is very easy to fall into the habit of thinking of the world of wine in terms of Old World and New World. Everyone does it. Old World (Europe) is associated with vins de terroir and the struggle against natural and market forces to produce wines of great distinction. New World (everyplace else) is associated with vins technologique and the business of selling large quantities of homogeneous wines to brand conscious consumers. Difference is the key attribute of the Old World. Sameness is the hallmark of the New.

Everyone knows that it isn’t as simple as this. Old World / New World is more of a spectrum than a dichotomy, for example, and difference versus sameness is an issue that cuts across every wine market and culture. But Old versus New is a convenient simplification and such shortcuts are hard to resist in our overcomplicated world.

Old World versus New World in France

Jean-Robert Pitte’s thoughtful new book forces us to confront the beauty of complexity by reminding us that the global battle for the soul of wine is also a local battle, fought most fiercely, perhaps, in his native France (Pitte is Professor of Geography and former President of the University of Paris Sorbonne). The opposing forces are not noble vignerons versus multinational corporation (as you might think after viewing Mondovino), but rather the two most famous Old World wine regions, Burgundy and Bordeaux.

Both wine regions, Professor Pitte reminds us, owe a debt to foreign influences, especially the Romans who introduced vines to France. Bordeaux is warmer and sunnier, like California, so grapes will ripen in the broad valley, permitting large vineyards and high production volumes. Burgundy is cooler and farther North, more like Oregon, so narrow hillside vineyard locations are needed to capture solar energy; individual vineyards are small and fragmented and the production correspondingly modest. Bordeaux wines, unlike their Burgundian cousins, are blended for style and consistency.

Both regions were shaped at critical moments by the markets they came to serve. Bordeaux, with easy access to the Atlantic, found a large market for powerful wines in Great Britain and Northern Europe. Wines needed to be strong to survive the ocean voyage. This large export market matched very well with the substantial productive capacity of Bordeaux. Burgundy’s location made ocean export impractical, but a vigorous internal trade emerged with Paris and the French court. Differences in tastes and the less stressful transport encouraged production of a lighter and more sensuous style of wine. Pure Pinot Noir versus sturdy, barrel-aged Cab and Merlot blends.

Both wines can be wonderful, but they can also be horrible. Vast quantities of unsold mediocre Bordeaux are distilled into industrial alcohol each year. Burgundy’s problem is less over production than unreliable production – the weather is a constant foe and the strict rules of the region restrain winemakers from correcting in the cellar the damage that nature inflicted in the vineyard.

Dysfunctional Family

Bordeaux is more New World, when you think about it that way, and Burgundy fits quite well the stereotype of Old World. So naturally they despise each other, which is the point of the book. The great debate about Old World versus New World wine is here revealed to be but a global projection of the continuing squabble among the members of France’s dysfunctional wine family. No wonder the conflict is so bitter.

Professor Pitte’s apparent self-appointed mission is to patch up family relations. He doesn’t want Burgundy to become Bordeaux or vice versa. He wants them to respect their differences and learn from each other. “Bordeaux and Burgundy, fraternal enemies, are two faces of a stimulating dialectic and debate that one must hope will not soon cease.”

In doing this Professor Pitte seems to stake out opinions in the deadly crossfire of the middle ground of many wine debates, which is where I often find myself. He doesn’t dispute the idea that wine is made in the vineyard, for example, but he doesn’t reject the notion that it can sometimes be improved in the cellar. He seems to respect both terroir and technologie as universal concepts.

He doesn’t think difference and sameness are as incompatible as they seem, but rather simply two faces of the same idea of wine. It is an interesting position to take – so French! Yes, I know, and so anti-French, too.

Bordeaux/Burgundy: A Vintage Rivalry by Jean-Robert Pitte (translated by M.S. DeBevoise). University of California Press, 2008. Originally published in France by Hachette (2005) under the title Bordeaux Bourgogne: Les passions rivals.

Glocalism and the Future of Wine in Argentina

August 18, 2008 By Mike Veseth in Argentina Leave a comment

The editors at WineSur, which is based in Mendoza, Argentina, saw my recent posts on wine glocalism (“Flying Winemakers and the Glocalism of Wine“) and some of the theory that tries to explain it (“Creative Destruction“) and asked me to write a brief piece for them. You can read it here: Globalism and the Future of Argentina’s Wine Industry. I’m looking forward to a research trip to Argentina in the next year or so. Thanks, WineSur, for your interest.

A Riesling Revival?

August 12, 2008 By Mike Veseth in Chateau Ste. Michelle, Dr. Loosen, Riesling, Supply and Demand, wine brands Leave a comment

A hundred years ago the most treasured and expensive wines in the world were not the great reds from Burgundy and Bordeaux, they were wonderful Rieslings from Germany. Since then Riesling has fallen on hard times in the market, although its status among wine critics and cult collectors has not wavered. Now there is change in the air. Have we entered a Riesling Renaissance?

Riesling Rendezvous

Woodinville, Washington was the center of the Riesling world for a few days in July when Chateau Ste Michelle and Dr. Loosen hosted a program called “Riesling Rendezvous” that brought together more than 200 producers, critics and industry representatives from around the world. (Chateau Ste Michelle let me attend to do research for my next book – thank you CSM for your support!). This was the second Riesling Rendezvous conference and a third round is planned for 2010.

Chateau Ste Michelle is the largest Riesling producer in the United States – more than 700,000 cases of their Columbia Valley Riesling are released each year along with a number of other Riesling wines that range from a Dry Riesling all the way to a deliciously sticky Ice Wine.

Dr. Loosen is a famous Mosel producer that has a decade-long relationship with CSM – they jointly produce a Washington Riesling called Eroica and work together in other ways – so their Old World – New World partnership makes this event a natural. Ernie Loosen (as everyone calls him) is a great ambassador for Riesling. He reminds me of the glass artist Dale Chihuly – funny, flamboyant, affable and dead serious about his work. We tasted a lot of wine at the event, including one that Ernie made in 1983 that still sings; quality Riesling is built to last.

The Curse of the Blue Nun

Riesling Rendezvous operated on at least two levels. The top level was a celebration of Riesling in all its diverse forms. The $50 ticket to the Grand Tasting on Sunday is one of the great values in the wine world, in my opinion, as dozens of producers poured their best wines on the Chateau grounds and the CSM chefs prepared finger foods to accompany them. Each of the trade sessions I attended included tastings of great Rieslings brought from afar by the producers. Honestly, no one could come away unimpressed with the state of Riesling wine today and the commitment that winemakers around the world have to this great varietal.

The state of the Riesling wine economy is another matter. The Riesling market went all to hell in the 1970s when German producers pumped out lots of low quality wines to try to appeal to a mass market (a market defined here in the US, I suppose, by the big jugs of sweet California “Rhine” wine that filled the supermarket shelves). They made the fatal mistake of devaluing their brand. Riesling’s reputation suffered and it has been a long struggle to rebuild it. Perhaps this is Riesling’s moment, now that everyone has grown tired by simple over-oaked Chardonnay and thin Pinot Grigio. Perhaps this is under-appreciated Riesling’s time to shine? Certainly the sales numbers are trending up, although a relatively small segment of the market accounts for most of the sales.

But Riesling has an identity crisis and a lot of the discussions centered around this fact. There is no one Riesling wine, as we learned through the tastings, because Riesling reflects it terroir so faithfully. Wines from different vineyard areas (or subject to different cellar choices) taste very different. This diversity is one of Riesling’s most appealing characteristics, but it makes it hard to sell to confused and uncertain buyers.

Consumers as a group tend to think of Rieslings in terms of a single characteristic: its sweetness. This is a shame because there is much more to wine than sweet versus dry, but it is Riesling’s particular burden, its Blue Nun curse.

Rieslings are sweet, of course, but they also are dry. I tasted wines that ranged from a few grams per liter of residual sugar (very dry) to perhaps fifty times that. But the key to Riesling isn’t dry-sweet, as Pierre Trimbach said on the first day, it is balance – the balance of sugar and acid and the other critical elements of the wine. The technical problem is to produce balanced wines of whatever degree of alcohol and residual sugar. The economic problem is to communicate to consumers the characteristics of the wine so that they can buy it with confidence. I would say that the Riesling Rendezvous showed that producers are closer to solving the technical problem than the economic one.

Riesling and Thai Food: How Many Stars?

Consumers want to know what’s inside the bottle and it is particularly hard to explain this with Riesling. The nature of the wine isn’t as transparent to buyers as the glass bottle it comes in. The German wine labeling rules classify wines by their sugar levels, which reveals something about the wine, but that isn’t as useful as you might think since two wines with similar residual sugar levels can have different tastes depending upon the acid balance, the type of sugar (some forms of sugar taste sweeter than others) and of course the myriad other factors associated with wine. The German code gives some information, but it doesn’t solve the problem. In a way, in fact, it might define the problem because it defines Riesling by its sweetness.

New World labels aren’t much help either. Only a few of them give technical data that would help a geek like me figure out what’s inside. Some use vague descriptors (what does “off dry” mean and why is this one producer’s off dry so much sweeter than another’s?) but most just make you guess what style of wine you have before you. Guess wrong three times in a row and I predict you will stop buying Riesling wine for a while.

A producer group, the International Riesling Foundation, is trying to address this problem by creating a clear and simple system that would tell consumers what to expect – something perhaps like the star system commonly used in Thai restaurants. You know how it works: one star is mild, five stars is very very hot. The star system makes people more comfortable ordering food at Asian restaurants, although there is obviously more to Thai food than just heat (and more to Riesling than residual sugar). It’s worth a try, I suppose. Even a trustworthy dry-to-sweet graphic index would probably help in the marketplace. Sake producers (see below) are working on this problem, too, although I wouldn’t recommend their particular descriptors (a translation problem?).

This is how different styles of Sake are described on www.sake.com

This is how different styles of Sake are described on http://www.sake.com

I hope that Riesling producers can find a way to make the complex characteristics of their wines clearer and therefore more appealing to confused consumers. Conferences like the Riesling Rendezvous are a useful way to get that conversation going. There is a natural tendency, however, for such gatherings to “preach to the choir” and focus on the well informed specialist market that already exists rather than the potential market of former Chardonnay drinkers looking for a more interesting wine, who could be drawn to Riesling if they understood it a bit better. I think this educational mission is the real challenge for Riesling Rendezvous III: thinking beyond today’s market to tomorrow’s.

I am hopeful that the International Riesling Foundation will make progress in this regard, but the collective action problem is significant here. It won’t be easy to get dozens of producers of differing size, style and market position to agree to standards and then implement them uniformly. It is more likely, I think, that a few of the big brands like CSM will lead the way and define the image of Riesling in consumer minds. Others will follow or not and so the future of Riesling will unfold.

Bargain Wine and the Big Mac Index

August 5, 2008 By Mike Veseth in emerging wine regions, globalization, Supply and Demand, Washington wine, wine price Leave a comment

These are interesting times for a wine economist! I’ve recently been interviewed by a national newspaper (wearing my international economist hat) about the presidential candidates’ policies and then by a popular supermarket cooking magazine (in my wine economist role) about exchange rates and rising wine prices.

The Dollar and the Wineglass

The dollar hit a new low against the Euro earlier this summer and although it has rallied a bit of late, Euro-zone imports are still very expensive. This affects the wine market in a number of way.

Old World wine import prices are being pushed up as the strong Euro works its way through the distribution system. Producers and distributors have tried to postpone price increases, but I think they have run out of wiggle room, especially with high energy costs pushing up transportation costs, too.

There is pressure to raise domestic wine price, too. Increased exports (the benefit of a weak dollar) have drained some of the domestic surplus. Those surpluses were a reason for low wine prices earlier in this decade, but they will soon be gone as we move through the Turrentine boom and bust wine cycle. (Unexpectedly large 2008 harvests in Australia and New Zealand, however, will moderate price pressures a bit in some market segments).

The cheap dollar is probably also at least partly responsible for soft Euro prices of French en primeur wines and the recent sale of the iconic California producer Chateau Montelena (of 1976 Paris tasting fame) to a French buyer. The Euro’s high cost has discouraged U.S demand for wine contracts (although indications of a weak vintage are also a factor) while the cheap dollar makes U.S. wine assets a relative bargain for foreign investors.

Exchange rates affect all international businesses and wine is no different. This is one reason why large wine companies go global, sourcing products and managing brands from many regions. Troubles in one area can be offset by opportunities elsewhere.

The McWine Index

Wine prices in the U.S. appear to be heading up – what’s a bargain-seeking shopper to do? That’s the question I was asked by the wine and spirits editor of a major cooking magazine. The answer is to try to make the exchange rate work for you, not against you. The Economist magazine’s Big Mac Index can help.

The Big Mac Index, which appears in the July 26, 2008 issue of the magazine, is a simple indicator of whether a currency is over-valued or under-valued relative to the U.S. dollar based on the price of the ubiquitous fast food entrée. The Euro, for example, is estimated to be overvalued by about 50 percent. A $3.57 Big Mac costs the equivalent of $5.34 (50 percent more) when purchased at Euro-zone prices at the prevailing exchange rate. European Big Macs are overpriced for dollar-holding buyers by this measure and so is just about everything else, including European wine. (The worst place to buy a Big Mac, according to the index, is Norway, where it costs the equivalent of $7.88 – ouch!).

The Big Mac index is a crude way of measuring the relative purchasing power of different currencies (to do this properly is a very complicated process), but the burgernomic indicator is generally surprisingly robust. It is pretty closely reflects the perceptions of tourists and traders and is often consistent with the more scientific results of detailed academic studies. Who knew that hamburgers could be so useful?

Bargain Wine Hunt

Where are most favorable exchange rates in the wine world for dollar buyers? The Big Mac index points to Argentina, Chile, Uruguay and especially South Africa. The South African Rand is undervalued by 37 percent according to the Big Mac index – that $3.57 hamburger sells for the equivalent of just $2.24 in Capetown. The cheaper Rand results in cheaper South African wines, even taking into account high transportation costs. That is helping these wines break into the U.S.market, although there is more than exchange rates involved in this process (watch this space for an upcoming report).

But Southern Hemisphere wines aren’t the only bargains. Washington State wines are exceptional values at every quality level and I included them in my cooking magazine recommendation list. Washington wines don’t benefit from an undervalued currency. Instead they suffer somewhat from an undervalued reputation, which results in relatively lower prices for the quality. There is so much focus on high profile California wines in the U.S. that great wines from other regions don’t get the attention they deserve. This condition, like today’s exchange rates, won’t last forever, so take advantage of it now.

Creative Destruction

July 31, 2008 By Mike Veseth in book reviews, Shameless Self-Promotion, Supply and Demand Leave a comment

I’m just back from the Riesling Rendezvous, where I tasted more than 120 Rieslings from around the world and met the producers (I will write more about this event next week). If there is any wine that reflects its local roots it is Riesling. But even Riesling is affected by global market forces, which brings me back to the subject of an earlier post: glocalism, or the intersection of global and local interests and forces.

Unreserved Concern

Steve Heinoff over at the Wine Enthusiast magazine’s Unreserved blog picked up on my earlier column and expressed his concern about consultants, flying winemakers, and the homogenizing effect of global market forces generally. I had asked the question, “Which feature will dominate – the global or the local, or will some synthesis emerge?’ Heinoff’s answer is pretty clear:

The synthesis, I would think, is not to be desired, for, as with all syntheses, the product is mush. Nor is much more globalization of wine a good thing; we’ve already gone too far in that direction. What would benefit California is a return to local conditions. The wine world here needs something along the lines of the locovore movement in food – the practice of eating foods grown and produced locally. We need wines that show true regional and sub-regional differences, the way they once did. I’m not sure it’s going to happen, though. Are you?

An op-ed piece by by Roger Cohen posted today on the New York Times website argues that at least in some circumstances the local can survive and even thrive, although this might not be the general rule. “Uniformity of style is one of the depressing aspects of globalization, and nowhere more so than in the wine business,” Cohen begins, noting the increasing sameness of wines (particularly red wines, which Heinoff also mentions).

But Champagne is different, he argues, and the recent decision to redraw the 1927 AOC lines will not diminish its quality or distinctiveness (even though it is widely viewed as a response to growing global demand pressure) but should, he says, by being more precise make the wines even better. “No rush to accommodate the global palate is at work here,” he writes.

The reason Champagne can resist global market forces, I suspect, is because it is a global market force. It is certainly a global brand, as Cohen’s piece acknowledges, one that producers in other countries attempt to emulate, including Champagne producers who now make sparkling wines abroad, in the U.S. Australia, New Zealand and Argentina.

Creative Destruction

My favorite economic analysis of local-global tension is a fascinating little book by Tyler Cowen called Creative Destruction (Tyler Cowen, an economics professor, is not be be confused with Tyler Colman, the political economist who is Dr. Vino). Cowen is particularly interested in the interaction of global and local forces in the production and consumption of creative products such as art, film and music. I do not see it as too much of a stretch to try to apply these ideas to the art of wine.

At the end of the day Cowen is as concerned as the rest of us with the potential for global markets to destroy what wine people might call cultural terroir. And, frighteningly, he invokes Hegel’s notion that “the owl of Minerva flies only at dusk” – somehow people don’t get wise to the threat until it is too late (something that is becoming all too clear on the climate change front). But he resists the urge to simply assume or assert that global market forces are the only ones that matter, that they are always all-conquering and that they always destroy.

Cultural exchange is pervasive, he argues, and what we assume is authentic local culture is often actually a hybrid result of previous waves of global, international or cross-cultural influence. Creative people are always finding ways to enliven the familiar by mixing in a bit of exotic spice. If you like fusion cuisine, well you know what I am talking about. This effect holds for food, music and art – Cowen’s book provides many interesting examples – and so we shouldn’t be surprised that it happens in wine, too.

In the beginning at least the global-local exchange is mutually beneficial. The global side benefits from the new creative stimulus while the local side gains from having a larger market for its cultural products. But things get twisted around as the market interaction intensifies.

Local terroir is strengthened in some ways because the larger global market encourages a specialist market made up of well informed consumers who appreciate the nuances of the real thing. My wife Sue, for example, is part of a global community of lace knitters who exchange information about books and patterns, ideas, techniques, tools and yarn and enjoy the conversations that go with them. No purely local market could support such a specialized art or craft as well as a larger market does. Globalization, by creating a wider market, allows greater specialization and so lace knitting thrives. The small benefits from the existence of the large.

I saw this at the Riesling Rendezvous, too. A global market may encourage production of an international style of this wine, but it also creates a bigger market for small producers with highly distinctive wines by expanding the community of enthusiasts who appreciate, study, collect and consume them.

So globalization can create, which is good, but obviously it also can destroy. This is especially true when market forces are unbalanced and the pressure to appeal to a large and undemanding audience is strong. Pretty soon everyone forgets about the real character of the original product and only the debased form remains. Lizzie Collingham’s 2006 book about globalization and Indian food, Curry: A Tale of Cooks and Conquerors, is perhaps the best study of this. If you were writing about wine you might call the book Chardonnay — or is that being too cynical?

Both Sides Now

I think we have to accept that there is both creation and destruction at work but also acknowledge that more than one outcome is possible. Great fusions are not always created. Worthwhile tradition is not always destroyed. The problem is to encourage creation without destroying what is really precious. That’s possible, but it’s very hard to do.

I talked about this problem in a different context in my 2005 book Globaloney. I wrote about the Slow Food Movement and how it seems to me and many others to be a step in the right direction – drawing attention to distinctive and traditional products and processes and, by expanding their market, preserving them. That’s the theory — that globalization can be used to undermine homogenization — but it doesn’t always work out that way in practice, as I discovered doing fieldwork in Italy. Here’s an excerpt from the seventh chapter of the book:

Another dinner in Umbria forced me to consider a dark side of the Slow Food movement that I had not previously noticed. We were staying near Deruta at an agritourismo, which is a sort of farmhouse bed and breakfast. The farm seemed to typify the Slow Food ideal. Not only was the prosciutto made from one of the farm pigs, for example, we even knew the pig’s name [it was Timmie]. What about the Slow Food movement, I asked? Our host shook his head. Very bad, he said. It can ruin everything. When Slow Food identifies an artiginal product, like a cheese or a salami, he explained, then suddenly everyone has to have it precisely because it has been given the Slow Food stamp. It must be the best. So they all rush in to buy this great thing, which of course cannot possibly meet this new demand. The producers try, but in doing so they cut corners or make compromises and end up destroying the very qualities that they set out to preserve. That’s what my Umbrian host saw in the Slow Food movement.

And that’s how many people see global market forces in general, even if there are exceptions like Champagne. I don’t want to end on this gloomy note, however. The Riesling Rendezvous experience has made me cautiously optimistic. Watch this space to find out why.