Screwed not Corked

July 26, 2008 By in cork vs screwcap, decanter, French Rabbit, sustainability, wine markets 5 Comments

“The rumors of my death” Mark Twain wrote, “are exaggerated.”  I wonder if the same is true about wine bottles and the corks that seal them?

Screwed!

Fine wine comes in a bottle and is sealed with a cork – this long been a given of the world of wine, but things are changing very rapidly.  I wonder what the Wine Wall at your supermarket will look like in ten or fifteen years? Will there still be bottles and corks?  Or is the death of wine tradition over-stated.

Corks seem headed for the endangered species list for all but the most precious age-worthy wines.  Non-cork closures including screwcaps were nearly invisible just 10 years ago (with perhaps 1 percent of the bottled wine market), but this is changing quickly.  A report in Meininger’s Wine Business Monthly suggests that about 35 percent of wine bottles–  over 2.5 billion units — had non-cork closures in 2007, including about 90 percent of New Zealand’s wine production.

Screwcaps have long been associated with inexpensive wine, but this too is changing.  The August 2008 issue of Decanter magazine features an article titled “50 Reasons to Love Screwcaps.”  Ten wine critics including Steven Spurrier and Linda Murphy recommend wines for summer drinking and comment on both the products and their screw tops.  “The screwcap closure is one of the best things to have happened to wine in my lifetime,” according to Spurrier (the organizer of the famous Judgement of Paris tasting.

“Given the choice of the same wine with screwcap or a cork, I’d choose the screwcap every time,” writes Joanna Simon, The Sunday Times wine writer. It’s a pretty enthusiastic endorsement, especially coming from Decanter. Economics is behind the move away from cork. Screwcaps are not remarkably cheaper than cork, but they avoid the loss of good wine to cork taint, generally estimated to affect about three percent of cork-closed wines. That’s a cost that winemakers would like to avoid.  But it can get much worse than three percent in individual cases George Taber wrote about a much worse situation in his great book To Cork or Not to Cork. A shipment of tainted cork almost ruined the David Bruce winery some years ago and destroyed forever the reputation of its Chardonnay wines. It had to rebuild (successfully) as a Pinot Noir maker.

Big Bag, Big Box

Don’t throw away your corkscrews yet – bottle and cork won’t disappear over night.  But the screwcap is replacing cork and the familiar glass bottle, well it’s under attack, too. As much as 30 percent of the 20 billion liters of wine sold this year will come in a non-bottle package – a bag-in-box “cask,” TetraPak “juice box” or something else. Economics is driving this change, as well.

Bag-in-box casks are cheap and efficient, and so we have come to expect very inexpesive wines to be sold this way, in 3-liter or 5-liter containers.  Think Franzia and Peter Vella.  The bag-in-box system is even used in international wine trade, but on a bigger scale.  Bulk wine shipments increasingly arrive in 20-foot shipping containers that hold 24,000 liters of wine in a single seamless bladder called a Flexitank. Wow, that’s really bag in box!

But it’s not just the cost of the container itself that is at work here.  Bottles are heavy to ship and costly to recycle. Rising transportation costs and increasing concern about carbon footprint are pushing the industry to look very closely at alternative packaging systems.

A French company is leading the way on this front, and I am not sure whether to be surprised or not. France is generally associated with resistance to innovation and change – picture the rebel José Bové torching a McDonalds in protest of its encroachment on French life and cuisine. On the other hand the France is home to many of the most dynamic multinational corporations – including two of the world’s five largest wine companies – and the country has a huge interest in the wine business, given that it is still the largest producer. So perhaps it just makes sense that they are innovators in this field.

What’s French for Entrepreneur?

The producer I’m talking about is Boisset Family Estates, which makes fine wines such as Louis Bernard in France and DeLoach here in the United States. Boisset seems to be pushing the envelope, selling a €150 screwcapped Chambertin as well as affordable TetraPak French Rabbit wines.  I wrote about French Rabbit in my earlier post, Red, White and Green All Over.

I think we will be seeing more and more wine in non-traditional packages — screwcaps, casks, plastic bottles and so forth.  Cost, quality and environmental concerns are all pointing in the same direction for  wines that are sold for everyday consumption.  Hmmm.  Maybe the days of the wine cork really are numbered.  Great — my cork collection may finally be worth something!

Flying Winemakers and the Glocalization of Wine

July 20, 2008 By in emerging wine regions, Flying Winemakers, globalization, Mondovino, Washington wine 3 Comments

Glocal is one of my least-favorite words – it’s part of the standard vocabulary in the globalization literature, which is where I spend my time when I’m not working on wine.  Glocal is a combination of global and local and is meant to describe the exchange between global flows and powerful local influences.  It hurts me to say it, but wine is increasingly glocal and the flying winemaker phenomenon is a good illustration of how it works.

Aero Merlot?

Flying winemakers are winemakers and consultants with clients and interests on several continents.  They are the part of a longstanding global exchange of human capital in the wine industry. It is very common, for example, for young people in the wine business to take jobs in several regions or countries, building up a portfolio of experiences, expertise and network connections before settling in to work back home.

Flying winemakers are both an obvious extension of these initial connections and the logical consequence of global wine investments, which see Champagne makers, for example, producing sparkling wines in France, California, Argentina and Australia.  It makes economic sense that high level expertise would be exploited globally, especially as the winemaking seasons are reversed in the northern and southern hemispheres.

The flying winemaker process takes Michel Rolland, the most famous wine consultant, all over the globe, but it also brought Katherine Williams, who I met through my research assistants Michael and Nancy Morrell, to Tsillan Cellars in Lake Chelan, Washington.  Katherine and her husband Adrian Lockhart are Australian winemakers who, having made reputations in Oz, now work abroad.  Adrian is head of Tohu Wines, New Zealand’s Maori-owned winery.  Katherine divides her time between New Zealand and Lake Chelan. Tsillan isn’t a high volume operation and Lake Chelan is what you might call an “emerging” wine region, but it’s linked in to the global wine network and can take advantage of international winemaker resources.

The Long Shadows Experiment

I began thinking about flying winemakers at a wine tasting at a local shop on Friday evening.  The wines were from Long Shadows Vintners in Walla Walla and a roomful of happy wine enthusiasts paid a tasting fee and queued up patiently to receive tiny tastes of five wines made from Washington grapes by some of the most famous winemakers in the world.  Long Shadows, you see, is the ultimate glocal wine experiment.

Allen Shoup, former CEO of the Chateau Ste Michelle group (and a legend in Washington wine), got the idea to use flying winemakers to draw global attention to Washington’s terroir. He built a cluster of wineries, hired Gile Nicault to be resident winemaker, and arranged for esteemed figures from the world of wine to fly in to Walla Walla and make one wine each. The tasting began with Poet’s Leap Riesling, which was made under the direction of Armin Diel of Scholssgut Diel in Nahe River Valley – a German take on Washington State’s bestselling varietal wine.  Next was Pedestal, a mainly Merlot blend by Michel Rolland.  Pedestal was followed by Pirouette – a classic Bordeaux blend by Agustin Huneeus and Philippe Melka – then a 100% Cabernet Sauvignon by Randy Dunn called Feather and a Syrah named Sequel by John Duval of Penfold’s Grange fame.  All the wines were from the 2005 vintage except the Riesling.

There are two other Long Shadows products that we didn’t get to taste.  Chester Kidder Red wine is an eclectic blend make by Giles Nicault and Saggi is a supertuscan blend made by the Folonari brothers, who should know how to make such a wine.  Poet’s Leap sells for about $20 and the red wines go for $45 to $60 per bottle according to my copy of The Wine Advocate, although the winery’s website says that they are sold out.  Tasting some famous “impossible to get” wines and the chance to buy a few bottles – that’s what drew a big crowd to the shop on a July Friday evening.

Blend it like Beckham

Big name flying winemakers like Michel Rolland are controversial because they are associated with the homogenization of wine – “international styles” are said to replace distinctive local wine qualities. That’s why Rolland is cast in the role of the devil in the film Mondovino. Long Shadows, however, aims to reverse the flow, to use global wine celebrities to highlight the quality of local terroir, so it is kind of a natural experiment in glocalism.  Which feature will dominate – the global or the local, or will some synthesis emerge.

Bringing Michel Rolland to Walla Walla is a lot like hiring the soccer star David Beckham to play for the  Los Angeles Galaxy.  The idea is to draw attention to the local team and help establish its domestic and international credibility, but it doesn’t always work out that way.  You’ve got to bend fan attention around the international celebrity back to the local product so the reputation eventually transcends the famous flying foreign connection.

I am not an expert wine taster (and this was not a good tasting opportunity), so I am not drawing any strong conclusions just yet.  The Riesling and the Syrah did impressed my research assistants (Sue Veseth and Anne and David Seago) as successful glocal experiments  – distinctly Washington wines but with an appreciable stylistic twist.  The other wines? Well, it is too soon to tell, in terms of the wines themselves, but they are obviously successful in drawing attention to the region and enhancing its reputation.

Note:  I’ll have a chance to meet a number of famous flying winemakers (and explore glocalization) next week at the Riesling Rendezvous meeting in Woodinville, Washington, which will bring together Riesling makers from all over the world  Watch this space for my report.

Wine Politics

July 17, 2008 By in Uncategorized Tags: , 1 Comment

Tyler Colman, Wine Politics: How Governments, Environmentalists, Mobsters and Critics Influence the Wines We Drink. University of California Press, 2008.

The French have a word for it: assemblage. It is the act of blending wine from different barrels and when it works the result is full and round, delicious. Tyler Colman (a.k.a. the internet’s Dr Vino www.drvino.com) has assembled stories about the social forces that affect wine in order to round out our understanding and appreciation of this glorious  product.  It is a very readable revision of Colman’s Ph.D. dissertation on the politics of wine and I think it’s a blend that will appeal to a lot of wine enthusiasts.

The contrasts between the Old World (France, especially Bordeaux) and the New World (California, especially Napa Valley) form the book’s main axis.  Alexis de Tocqueville famously noted that a distinguishing characteristic of the young United States was the unexpected vitality of its voluntary associations. Americans didn’t look always to the state, he wrote, they worked together to solve collective  problems.  Nothing like it in France, with its strong state controls.  But wine is different, Colman explains.  Regional wine associations (like the groups behind the appellations d’origine contrôlée system ) play a strong role in France while the heavy hand of the state (the French call it dirigisme) is seen in America’s rigid regulation of wine (and alcoholic beverages in general) and the complex and cumbersome three-tier distribution system that makes it all but impossible for some wine enthusiasts to legally purchase products that are readily available just across the state line. Colman’s history of the political process that brought us to this situation makes good reading.

Green power politics is part of the blend, too, as Colman contrasts the influence of environmentalists in California with the biodynamic movement in Europe.  The politics of the palate – and the influence of wine multinationals and critics  like Robert Parker (and Dr. Vino himself?) — rounds out the final product,  Colman concludes on a upbeat note:  the relationship between wine and society here in the United States is complicated, a mixture of politics and economics, wealth and power, science, tradition, religion and environmentalism and there are a lot of problems to be solved, but he’s optimistic – we have more and better choices and a growing wine boom to push the process along.

It’s not really surprising that I would like this book.  It’s called Wine Politics but there’s a lot of wine economics here, too. You have to be a little bit of a wine nerd to want to study the political economy of wine when you could just spend your time and money sniffing, swirling and slurping and I guess I fit that profile.  The broad themes are important and there are plenty of interesting historical tidbits that you can work into conversation at your next wine tasting party.  Now, for example, I know why Two Buck Chuck, which costs $1.99 in California, sells for about a dollar more here in Washington.

Thinking critically, I would have appreciated a bit more depth on some of the topics (many of the chapters are strings of short blog-length entries) and I wish that there was a stronger central theme.  Yes, wine is affected by many social forces.  Well, so what?  A long memorable finish is something I look for in a wine … and a wine book.

Congratulations, Dr. Vino, on a successful first cuvée.  I’m looking forward to your next book, which is due out this fall.

Breaking In

July 2, 2008 By in British wine market, decanter, Gallo, Paul Gregutt Leave a comment

I’ve written before about the British wine market, the most important marketplace in the world of wine.  Everyone wants a place on Britain’s Wine Wall, but breaking in isn’t easy to do, as a recent Decanter article and a conversation with one of my former students makes clear.

Decanter Discovers Washington Wine.

Many Washington winemakers are keen to try to get their feet in the door of European markets.  They figure that the time is right: the dollar is cheap and their wines are excellent. They cannot help but be pleased, therefore, with the July 2008 issue of Decanter magazine, which features an article about Washington wine by regional wine critic Paul Gregutt.  Three pages of text, maps, photos and wine reviews – it’s a nice package.  Several of the wineries mentioned even backed up the effort with two pages of advertising.  A really good display for Washington wines in the world’s most influential wine magazine.

But there’s a problem. British buyers know about these great wines now (more than ten wineries are mentioned including Columbia Crest, Seven Hills, L’Ecole 41 and Reininger), but only one (Columbia Crest) has current British distribution.  Want one of the other nine?  Call the winery in Washington State, the Decanter listing says. You’ve got to wonder how many buyers will do this and how many will just turn the page to the next New World wine – one that is actually available in Britain. You need publicity to get distribution, I know, but publicity without distribution doesn’t make the cash register ring.

On a different note, I have to wonder about the quoted price for the Columbia Crest Horse Heaven Hills Chardonnay.  Wine Spectator gives it 91 points and lists the price at $15.  The British price is apparently £19.53 or about two and a half times as much in dollar terms.!  It’s not going to be easy to break into European markets under these circumstances,

When Gallo Went to Europe

Gallo today is a classic American integrated wine multinational.  Although it is based in Modesto, in the heart of California’s Central Valley, and the bulk of its business is U.S. market, Gallo has complex international linkages.  Gallo sources wine from Italy, France, Australia and New Zealand and sells wine in Europe, Japan, and Latin America.  But it wasn’t always that way.  Gallo’s was drawn into the global marketplace in the 1980s, attracted by the markets in Britain and Germany.

I asked my former student Steve Emery to tell me what happened when these American wines (and American wine ideas) invaded Europe.  Steve is CEO of Earth2O, an Oregon company that bottles and distributes water from pristine Opal Springs near scenic Bend, but in the late 1980s he was Director of Sales for Gallo’s program to establish its varietal wines in England, Ireland and Germany.  His experiences say a lot about the nature of global wine then and now and the problems of breaking into new markets.

Getting Gallo into Europe was difficult, Steve told me, although ultimately successful.  Even though Gallo is a huge presence at home, it was an unknown quantity abroad.  I remember seeing Gallo wines on the shelf of my local wine shop when I taught in England in 1989 and I was surprised at the price point.  Gallo wines seemed expensive to me, about the same price as the most popular French and Italian wines on the shelves.  I expected Gallo to be a cheaper brand like it was at home.  But the advantage of lower price wasn’t really possible in the British market, given such obvious barriers as transportation costs and not-so-obvious hurdles such as the British wine tariff.

Many countries tax wine imports, whether to collect revenue, protect domestic winemakers, or try to shift consumption to other commodities such as local beers and spirits.  Britain is not unusual in this regard.  What makes Britain different is that the tax is relatively high and levied on a per-bottle basis (and only on non-EU wines, of course).  Britain collects more than $2 on each bottle of imported. (£1.29 according to a recent Rabobank report).  The flat per-bottle tax has a way of shifting the demand for wine towards more expensive products.  A $2 tax on a $2 wine represents a 100 percent tax. For a $4 wine, a $2 tax increases the price to $6, a 50 percent rise.  For a $10 wine, the tax raises the price to $12, only a 20% increase.  So the tariff falls heaviest on lower price goods and shifts the market upscale towards better or at least more expensive bottles and wines produced in the EU, not the New World. The cost advantage that Gallo enjoyed  in the United States was partially offset by the British tariff regime.

But that wasn’t the main problem, Steve told me.  The British supermarkets were savvy retailers – some of the wine buyers were highly trained Masters of Wine – the highest designation in wine education.  But they were organized to purchase and market wines based on geographic region rather than brand or type of wine.  As Steve says, they didn’t think in terms of brands (apart from the obvious fact of their own store brands).  This is true even today.  If you go into a Marks and Spencer store in Britain, you will find a world of wine available, but the wine is mainly organized and labeled according its place of origin rather than a US-style brand.  The wine’s “pedigree” (Friuli D.O.C. Grave Merlot, for example, or Macon Rouge, appellation Macon Rouge contrôlée) is listed in big letters, but the maker’s name and the brand – custom bottled for Marks and Spencer – are tiny by comparison.  The wines that Gallo sent to Europe were California wines, a useful geographic designation, but Gallo was the brand that defined the wine, not California.

British wine marketing was also different in other ways.  Steve told me that the British weren’t applying the basic Wine 101 lessons he learned with Gallo in the U.S. – lessons about where to put the most profitable wine (right at eye level on the shelf), where to position your target products in a wine cooler (on the right, where most people will look and reach first) and the many strategies of point-of-sale merchandising. They also introduced print advertising to the wine market successfully.

Gallo had to adapt, Steve said, to be successful in the foreign environment, even replacing the practical screw caps on its least expensive wines with more traditional cork closures (creating a shortage of corks in the process).

The German Problem

Germany was even more difficult, Steve said.  That’s easy to understand given the focus on bargain basement wines.  It doesn’t seem like most German buyers are interested in paying for a brand.  Low price seems to be the main factor and cheaper wines were readily available, Steve said, from Germany, Italy and France.  The supermarket wine buyers didn’t want to talk to him, Steve said, so Gallo resorted to guerrilla  marketing.  They got into the stores through the meat department, using a technique called cross-merchandising.  They sold the wine as the perfect accompaniment to beef, chicken and fish rather than wine alone.  Every meat purchase was therefore a potential wine sale as well.  You are probably familiar with cross-merchandising yourself, even if you’ve never heard the work before.  It is the process that has placed small displays of wine all over your supermarket, so that you never miss an opportunity to pair up wine with whatever you actually came to buy.  The Germans seem to understand cross-marketing very well now.  I visited my local Trader Joe’s this morning and found wine everywhere. I think there was probably more wine spread throughout the store than in the wine section itself.

The wine business is very competitive and Gallo found that the “rules of the game” were much different in Europe.  Wine is regulated as an alcoholic beverage in the U.S., so every aspect of its sales is subject to federal or state regulation.  In Europe, however, Steve said, wine is just another product and the competition is much freer.  That’s why he was able to bargain with the meat department managers in Germany rather than go through the wine buyer department.

Gallo was very successful in Britain and in Europe and many other American wine companies have followed them, but that hasn’t eliminated the challenge of breaking into new markets.  I wish our Washington winemakers good luck in their well-timed assault on the Old World markets. It’s not going to be easy.

Attack of the Super-Cuvées

June 28, 2008 By in critics, decanter, wine critics, wine markets, wine price, wine ratings 1 Comment

I’ve been thinking a lot recently about the different strategies winemakers use to sell their products and I find myself coming back again and again to a particularly good column by Andrew Jefford in the June 2008 issue of Decanter magazine.  Jefford demonstrates how important economic factors are in shaping what gets poured into your glass.

Bordeaux, Burgundy and Super-Cuvée

Winemakers generally find themselves working with variable quantities and qualities of fruit and the individual wines made from that fruit.  What should be done if some of the raw materials are much better than others as is typically the case?  Blend them all together?  That’s what happens sometimes, especially in the less sophisticated cooperatives in Southern Europe.  The result is often a whole that does not exceed the sum of its parts.  Historically, Jefford explains, there are two dominant approaches to the problem of wine quality to take into account variable wine quality.

The first is the Bordeaux strategy.  The best lots are blended into the grand vin — the one that sells for a high price (in good years at least).  Good wines that just don’t make the cut for the grand vin go into a second label.  Lesser wines are sold off on the bulk market or even a third label.  The system is transparent, relatively consumer friendly and the wines are as good as the vintage allows.  In The Wine Advocate’s report on 2005 Bordeaux, for example, the grand vin Latour (96+ points, 12,000 cases) costs $1125 while the second wine Les Forts de Latour (92 points, 10,000 cases) is less than $200.  A third wine, designated simply Paulliac (89 points) sells for about $60.  Something for everyone, I guess, and a pretty clear hierarchy of wines, although not every Bordeaux producer listed in Parker’s guide displays such a clear link between price and apparent quality.

Burgundy provides a second model, according to Jefford.  The top wines are released as individual vineyard-designated wines and the remaining wines are blended together in to an appellation-designated wine.  I am not an expert on Burgundies, but I have seen this in Oregon, where some wineries release a one Willamette Valley Pinot Noir along with several vineyard designated wines.  This makes the wines very interesting if you are able to taste them side-by-side, but it can otherwise be confusing.  I think it shifts a bit of power to the wine critics and specialists.  But that’s fine if the terroir really comes through and the wines are significantly different.

The third strategy, which Jefford links to the Rhône, is to create a tiny amount of a sort of super-wine that is made, more or less, to gain high scores from wine critics.  I know that wine makers always say that they don’t make wines to get high scores, but a few have privately told me that big Parker numbers are so valuable that they don’t hesitate to make some wines to try to impress wine critics like RP.  Most customers won’t have a chance to buy the Parker wine, it is true, because the production is so small, but the benefits to the winery’s reputation may extend down the line and boost prices and sales of the other wines.

Money, Taste and Power

“Let’s set aside the question of income,” Jefford writes, because he is concerned with the effect of the three systems on the quality of the wine.  The Burgundy system, with its stress on terroir, makes sense when there really is terroir, but otherwise he argues in favor of the Bordeaux plan because it produces more complete wines, wines of good “disposition,” as he puts it. Wines that are good to drink.

The Super-Cuvée strategy, he fears, makes wines that are good to taste (and rate), but not to drink because they are wines of “accumulation,” monster wines, where winemakers seek high scores by adding more and more layers of identifiable attributes to the super-wine at the expense of the quality, complexity and completeness of the wines that make up the bulk of production.

On the face of it, Jefford’s critique of super-wines and the rising power of critics associated with them is based upon taste, but as the column continues it is quickly apparent that he cannot leave the wine economics out of it, because it is at the heart of the problem. The Bordeaux model doesn’t just make better wines, he suggests, but also better incomes in the long run for all producers.  The simplicity of the single Grand vin strategy makes wines more understandable and a “perfect building block,” as he says for a reputation.  He credits Bordeaux’s use of this system in part for their consistently strong reputation and ability to attract investment and maintain strong prices.  He contrasts this with the “chaos and frenzy” of the Super-Cuvées and the “false intellectual challenge” of the many single-vineyard offerings.  Pretty strong words, I would say.

The Burgundy and super-wine strategies depend in different ways on the power of wine critics (like some of those who write for Decanter).  Wine critics validate the legitimacy of single-vineyard offerings and create super-markets for the Super-Cuvées.    It would be interesting to study what factors lead winemakers, especially New World producers, to choose one approach over another.  Perhaps it is terroir.  Perhaps it is scale, training or philosophy.  Or perhaps it is access to wine critics and the power they can have in the marketplace.  Watch this space for more research on this interesting question.

Dollar Daze on the Wine Wall

June 21, 2008 By in exchange rates, New Zealand, Supply and Demand, wine markets 1 Comment

You know that wine economics has become mainstream when you find yourself listening to it on the car radio.

The Dollar and the Wine Wall

Marketplace, a program of American Public Media that is broadcast by many National Public Radio stations, recently featured a story called U.S. Winemakers Toast a Strong Euro. Go ahead and click on the link to listen to the story or read the transcript.

The basic idea, which my International Economics students will recognize immediately, is that exchange rate changes create many direct and indirect winners and losers. This is particularly true in the increasingly integrated global wine market. The Euro has appreciated from about USD 1.35 per Euro to about USD 1.55 in the last year, which means that a wholesale €10 bottle of French or Italian wine’s dollar cost has increased from $13.50 to $15.50. This pushes the retail price from about $20 to $23 or $24, assuming a full cost pass-through, which puts it at a different price point on the supermarket shelf. Higher shipping costs will nudge the dollar price a bit higher still. Basically, you’re looking at a $20 wine selling for as much as $25. U.S. wines are corresponding cheaper in Eurozone countries.

U.S. winemakers hope that the falling dollar will be their ticket to higher sales abroad. I wrote about this in January when a group of Washington and Oregon wineries organized an export event in London. It is difficult to get traction in foreign markets, but the dollar’s weakness should help.

In the meantime, rising import prices here give domestic wines an advantage. Wine buyers tend to make most of their purchases around particular “comfort zone” price points and rising import prices should create some advantageous substitution effects. This comes out in the Marketplace interview. One wine professional puts it this way

Say if they used to enjoy a Sancerre for $20 and now their favorite producer is $25, they’re going to look for a comparable producer in that same price range that they originally purchased.

And the idea is that the “comparable producer” might be from the U.S., although this isn’t always the case.

Now Things Get Complicated

A falling dollar encourages exports and discourages imports — so far we are following the textbook pretty closely. But real world economics, and wine economics in particular, is seldom so simple. Foreign wine producers and distributors obviously have an incentive to keep from losing their market and there are many strategies to soften the exchange rate effects. The New Zealand producers, for example, seem to have been pretty successful in finding new markets for their wine and strengthening their reputation in response to the rising New Zealand Dollar. So far NZ wine seem to be defying gravity — higher quantities and higher prices too. But not everyone can pull of this bit of magic (or necessarily do it forever in New Zealand’s case).

One way to retain market share is for European exporters, distributors and retailers to absorb some of the exchange rate effects themselves, limiting what economists call the “pass through effect.” Canadian wine columnist Anthony Grismondi wrote about this in April in the Vancouver Sun.

I think European winemakers will be under a lot of pressure this year as container shipping costs continue to rise and the Euro’s strength persist. Not all of these higher costs can or will be passed along immediately in the form of higher dollar prices. The biggest effects will probably be felt on low cost wine, where the shipping cost effect is proportionately greater and price sensitivity is higher, too. Look for foreign wineries to go upmarket if they can and to absorb costs or adjust in other ways if they can’t.

But high end wines are not immune from exchange rate problems. Decanter reported in March that the strong Euro was expected to depress prices for Bordeaux en primeur sales.

Winners & Losers

The dollar hasn’t fallen uniformly relative to all currencies. A dollar buys 3.1 Argentine pesos today, for example, which is about the same as a year ago (Argentina’s compounding economic problems have caused a run on the currency in recent days). The Chilean Peso has not appreciated as much as the Euro and the South African rand is actually cheaper in dollar terms than a year ago.

One well known Australian brand, Lindemans, has been sourcing wine from Chile and South Africa to keep costs down as the Australian dollar has risen — a controversial but not uncommon practice in today’s small world of wine. Look for the Lindemans “Country of Origin” wine series.

This suggests that the Dollar Daze on the Wine Wall might feature some interesting shifts, from France and Italy (and Australia and New Zealand) to Argentina, Chile and South Africa. Is it my imagination or are the wine critics and magazines already riding this wave by featuring these New World regions more prominently in their publications?

Australian Winequake

June 12, 2008 By in Ascentia, Australian wine, brands, Constellation Brands, Foster's, The Wine Group, wine brands, Yellow Tail Leave a comment

Market tremors seem to be felt everywhere — food, fuel, money, natural resources. And now in the wine world.

Wine Tremors

It has been hard to ignore the feeling of instability in the wine world for the last few months. There has been a lot of shifting around of brands and alliances, as if the big wine producers are feeling off balance and need to get recentered. In January, for example, Constellation Brands, the world’s largest wine company, sold off their high volume Almeden and Inglenook brands along with the Paul Masson winery to The Wine Group. The reported logic was that Constellation wanted to focus more on premium and superpremium wines. The Wine Group is a privately held San Francisco-based company that has its roots in Coca Cola’s old wine division. (See Note below.)  It makes and markets a variety of high volume brands, including Franzia, Concannon, Corbett Canyon, Glen Ellen, Mogen David and several international brands.. It is the third largest wine company in the United States, behind on Gallo and Constellation, with 44 million case sales in 2007.

I felt another tremor on Tuesday, when a Decanter.com story reported that Constellation had sold more of its wine brands, this time to a new Healdsburg, California-based group called Ascentia Wine Estates. The wineries are Geyser Peak Winery in Alexander Valley, Atlas Peak in Napa, Sonoma Valley’s Buena Vista Carneros, Gary Farrell Winery, Washington’s Columbia Winery and Covey Run, and Idaho’s Ste Chapelle. They produce about a million cases of wine a year between them. Vineyards in Napa and Sonoma county were included in the $209 million deal. The logic, the article said, was to allow Constellation to continue to sharpen its focus on key upmarket brands.

There are several interesting things about this sale. From the Constellation standpoint brands like Geyser Peak, Buena Vista Carneros and Columbia are a good deal more upscale than high-volume Almaden and Inglenook brands that were sold in January. Constellation sold 59 million cases of wine in the U.S. alone in 2007, so the loss of a million case capacity is less important, I think, than the sign that the company is very serious about reshaping itself to adapt to changing market conditions. Constellation says that they are going to focus on fewer brands at the top of the pyramid and I guess they really mean it.

Ascentia is clearly making a different bet. Ascentia is a private group that includes major investors GESD Capital Partners, a San Francisco-based private equity fund, wine distributor WJ Deutsch & Sons and Jim DeBonis, former chief operating officer of Beam Wine Estates (several of the brands included in this deal were part of the Beam Wine Estates portfolio when Constellation acquired that operation last year).

The involvement of the Deutsch family is significant. Deutsch is the masters of marketing and distribution of value-priced wines. They partnered with Australia’s Casella family to create [Yellow Tail], the best selling import wine in the U.S. (I have written about this in my [Yellow Tail] Tales article. They also import and distribute George DeBoeuf, J. Vidal Fluery and other important wine brands. They clearly see opportunity where Constellation does not. It will be interesting to see how this group adapts to the shifting wine landscape. I cannot believe that they are through assembling their new portfolio because I think there may be more wine brands on the market soon (see below).

Winequake

The news from California on Tuesday regarding the Constellation-Ascentia deal was interesting. But the news from Australia in yesterday’s Financial Times as stunning and represents the first of what might prove to be a series of significant winequakes.

Foster’s, the big Australian drinks group, announced major write-downs of its wine assets and the resignation of its CEO, Trevor O’Hoy. The FT’s Lex column summarized the situation like this:

We all know the feeling: a night of bacchanalian excess followed by regrets and a light wallet the next morning. Foster’s, after a 12-year bender in which it spent A$8bn in the wineries of Australia and the US, has a severe hangover. Australia’s biggest beer and winemaker on Tuesday announced A$1.2bn of write-offs, lowered profit forecasts and parted company with its chief executive.

Foster’s last big splurge, the A$3.7bn purchase of Southcorp, is partly responsible. Foster’s bought the Australian winemaker in 2005 for a generous 14 times enterprise value to forward earnings before interest, tax, depreciation and amortisation, among the highest multiples for deals in the wine sector at the time. It even mocked Southcorp, as it attempted to defend itself against the hostile takeover, for being unduly conservative with respect to its own earnings forecasts.

Fast-forward three years and the hubris has been punished. Integration was botched, partly due to the ill-judged decision to blend sales forces into a single unit in Australia. In the US, distribution was poorly managed. External factors packed the final punch. Australia’s vineyards produced a glut of wine and prices plummeted. The Aussie dollar surged, from about 76 US cents at the time of the acquisition to 95 cents today. Foster’s reckons that every cent move lops A$3.2m off the wine business’ earnings before interest and tax – forecast to total A$1.2bn this year.

Fosters owns 22 wineries in five countries and 60 wine brands, including Beringer, Lindemans, Wolf Blass, Penfolds, Rosemont and Matua Valley. Among other things it is writing off A$ 70 million of bulk wine inventory. It will try to trim its US inventory by 1.4 million cases. (Fosters was the fifth largest wine seller in the U.S. in 2007 with 20 million cases, about the same as Bronco wines and its Two Buck Chuck brand). This is more than a tremor. What does it mean? It is a Foster’s problem, or does it have larger significance?

The assumption for the last few years has been that bigger is better in the global wine market and that big global firms like Constellation and Foster’s had an unbeatable advantage. Is this just a shakeout, or are these recent events a signal that the world of wine is experiencing a fundamental change? Watch this space for updates.

Note: Coke purchased Franzia some years ago and built its wine division from that foundation. The Franzia family now owns Bronco Wines, the Two Buck Chuck company.

New World Meets the Old in Argentina

June 3, 2008 By in Argentina, emerging wine regions, EU wine reforms, globalization, Supply and Demand Leave a comment

The latest news from Argentina is good — exports are up 40%, according to a report on Decanter.com. A New World wine success story! Or is it?

Old World versus New World

Everyone who writes about wine ends up talking about Old World versus New World wines at some point. It is convenient shorthand, I guess. The OId World usually refers to the European heartlands of wine, France, Italy, Spain. The New World is pretty much everyplace else, but especially the US, South Africa, Australian and New Zealand, Argentina and Chile.

Simple dichotomies are often problematic and I think Old World versus New World raises some issues. Old World is often code for tradition, terroir and sophisticated taste while simple industrial wines are associated with New World producers. But it is easy to find counterexamples on each side of the divide. It’s hard to think of Beaujolais Nouveau as embodying the three Ts of Old World orthodoxy — Nouveau seems like the classic Chateau Cash Flow McWine. There are many New World producers, on the other hand, who seem to take the traditions of wine very seriously. John Williams at Frog’s Leap comes to mind. So sometimes it is difficult to know where Old World ends and the New one begins

This is particularly true of Argentina. Winegrapes came to Argentina in 1541, a couple of hundred years before vines showed up in Australia and New Zealand. We tend to think of Argentina as a New World producer because it seems like its wines have only appeared on world markets in the last ten years or so. In fact, however, if you look back a few years you find a much different narrative– a classic Old World wine story.

Old World Argentina

Argentina was settled by migrants from the Old World wine countries, especially Spain and Italy, so it is not unexpected that wine has long been part of its culture. But it might surprise you to know how much Argentina reveals its Old World roots. Argentine wine consumption has until quite recently been very high — Old World high. Looking back to the early 1960s, for example, the heaviest wine consumers in the world were the French (122 liters per person per year), Italy (107), Portugal (100) and then Argentina (83). Spain (61 liters per capita) and Chile came next. No other country came even close.

Argentine wine production was necessarily quite high, too. While France and Italy dominated global wine output in the 1960s, producing almost half of all wine between them, Spain (10%) and Argentina (7.5%) came next (followed by the North African countries that exported mainly to France). Argentina was the Australia of the 1960s.

But with one big difference. Australia (and to a lesser extent Chile) are significant wine nations today because of their high export volumes. Argentina, however, has always produced mainly for domestic consumers (it was actually a net importer of wine in the 1960s as near as I can tell). So it is Old World in terms of wine production and consumption, and has only recently become New World in terms of its global export market presence.

Argentina shares two other important wine attributes with its European relations, both of which are related to wine crises. Argentina’s first crisis, from which it is still emerging, was caused by protectionism. Starting in the 1930s, Argentine winemakers sought and received protection from foreign competition and then subsidies to support domestic production. Arthur Morris of the University of Glasgow wrote a good article on this a few years ago in the Journal of Wine Research. Winegrowing in the subsidized, protected market focused on quantity rather than quality and bad but very cheap wine was the result. There was no incentive to favor quality in the vineyard because good grapes and bad grapes were all mixed together in the cheap bulk wines that urban workers gulped down. Argentina made a lot of wine, but didn’t export any. Who would buy it? This produced, predictably, a crisis of over production.

Don’t Cry: Market Reforms

The big change occurred, according to Professor Morris, when Argentina’s economic policies changed course in the 1990s. The subsidies dried up and decent wines began to trickle in from abroad, establishing a higher standard. An aggressive grubbing up program reduced vineyard area by a third.

The game was up for inferior domestic brands. Competition changed the wine market dynamic, shifting it from quantity to quality. It took only a few years for higher quality Argentine wines to reach the world market, where you see them today. That’s when Argentina became a “New World” producer.

The market reforms that the Argentine industry implemented in the 1990s remind me of the EU agricultural market reforms that Old World wine producers will experience in the next few years. The Argentine reforms seem to have worked, which may be a good omen for the Old World producers, but the industry had to live through a deep crisis first.

It is a good thing that Argentina has made the shift to a wine exporter because of the second crisis it shares with the Old World: collapsing domestic demand. Wine consumption has fallen by about half in France since the 1960s, for example, as consumers have shifted from wine to beer, spirits, sodas and now water. Wine demand declined proportionately more in Argentina, from 83 liters per capita in the 1960s to only less than 30 liters today. The Decanter.com article reports that this trend continues. Argentina has dodged this bad news bullet to a certain extent, however, because of its new focus on quality-driven export markets.

The map of world wine consumption is changing fast. You could define the Old World as the part of the map where high consumption rates have collapsed– France, Italy and Argentina are all there. The New World is where wine cultures are actually growing. Wine market reforms, like those that Argentina has taken and the EU now plans, seem necessary to rebalance the map and align global demand and supply.

Older, Newer: The Wine Lexicon Evolves

Pretty soon we are going to have to invent new terms to describe planet wine– Old World and New World have just about run their course. China and India are obviously not Old World wine countries (although China has made wine for nearly 2000 years) and not exactly New World, either. Perhaps, taking a cue from financial markets, which talk about emerging market economies, we will call them Emerging Wine countries.

And then there are countries like Georgia, Romania and Moldova that produce huge amounts of wine, some of which is now finding its way onto global markets. Old World or New? Old World, if you go by history. Georgia is where wine was first made, according to some historians. But the wine industries in these countries are still recovering (emerging) from the dark Soviet years, when quantity ruled and quality pretty much disappeared. Now, as their industries modernize, they are beginning to enter the market, too. So are they the Oldest World — or maybe the Newest one — and confronting the biggest challenges?

Sideways meets Bridget Jones

May 29, 2008 By in British wine market, Oz Clarke, Sideways Leave a comment

It is easy for wine enthusiasts to get carried away sometimes and to over-think the whole idea of wine. Sure cure for thinking too much: go to a movie.

The Sideways Effect

Most readers will already be familiar with the Sideways effect, named for the 2004 motion picture of the same name. In this film one of the protagonists, Miles, expresses a deep love for Pinot Noir and a complete disdain for Merlot. He loves Pinot because it is so fragile …

“It’s a hard grape to grow. As you know. Right? It’s, uh, it’s thin-skinned, temperamental, ripens early. It’s, you know, 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. You know? And, in fact, 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.”

Merlot, by contrast, must be simple, sturdy, unsophisticated, easy. Anyone can make Merlot. Who wants to drink that — loser wine. (Wine geeks will remember that Miles’s most treasured wine — the one that he desperately drinks out of a styrofoam cup in a moment of self-pity — is ironically a mainly Merlot Cheval Blanc from Bordeaux.)

You may love the film or hate it, but its effect on the wine market is well known: it took an emerging Pinot Noir trend and magnified it, making Pinot the hottest grape in the vineyard. And it contributed to the decline in Merlot sales, too. It’s interesting that a movie could so shape the image of these wines as to produce significant market effects.

But that’s here in America. This could never happen in Britain, where wine consumers are more sophisticated.

The Bridget Jones Effect

But wait. It has, according to an article in The Telegraph. Chardonnay sales are slumping in Great Britain and British wine critic Oz Clarke blames it on Bridget Jones, the movie character who drowns her troubles in glass after golden glass of cheap Australian Chard. “Until Bridget Jones, Chardonnay was really sexy. After, people said, ‘God, not in my bar.” according to Clarke. Now, I guess, it’s loser wine like Merlot.

“Bridget Jones goes out on the pull [WineEconomist translation: singles bar scene], fails, goes back to her miserable bedsit, sits down, pours herself an enormous glass of Chardonnay, sits there with mascara running down her cheeks saying, ‘Dear diary, I’ve failed again, I’ve poured an enormous glass of Chardonnay and I’m going to put my head in the oven.’” Clarke writes, “Great marketing aid.”

A retail market analyst estimates that 7.5 million fewer shoppers picked Chardonnary this year in Great Britain. Sales of other white wines such as Sauvignon Blanc and Pinot Grigio have risen.

The biggest direct effect is in Australia, the source of much of Britain’s popularly priced Chardonnary. Foster’s has reportedly announced that it will not pay more than about $300 per ton for bulk-wine Chardonnay grapes next year, a low price and bad news for growers there. That will put the squeeze on them and they must wonder at the strange logic of the wine world where they suffer because Bridget Jones can’t seem to meet the right guy.

Wine and Identity

I haven’t seen the Bridget Jones films but I’ve watched Sideways and it is pretty clear to me that wine is a powerful image in the film because it is so obviously a metaphor for the main characters. Miles is just like the Pinot Noir that he describes — fragile, tragic and perhaps (and only perhaps) worth the effort that it takes to reach him. Jack, his gregarious, promiscuous buddy, really is Merlot. Easy, simple, stupid at times, and very very popular.

The larger lesson to be learned from all this is the power of identity in consumer behavior. Affluent consumers don’t purchase products so much as they construct personal identities. Goods and services are not ends but means. This is true in many product areas (homes, fashion, autos), so why shouldn’t it be true for wine, too.

Although we may like to think that it is the wine that is the focus of our passion, the Sideways and Brenda Jones effects suggest that identity — how wine makes us think and feel about ourselves — may sometimes be more important than the wine itself in shaping the decisions that wine drinkers make.

Tyranny of the 100 Point Wine Scale

May 27, 2008 By in book reviews, critics, Paul Gregutt, Washington wine, wine critics, wine ratings Leave a comment

Wine rating systems are like the weather — everyone complains about them but no one does anything. Paul Gregutt thinks he knows why.

Wine by the Numbers

There are many ways to rate or rank different wines and consumers are very interested in trying to understand what they mean and how to use them. That’s why my column on wine rating systems, Wine by the Numbers, is one of the most popular posts in this blog’s brief history.

Twenty-point rating systems are popular in Europe in part, I understand, because that is how papers are graded in French high schools. Here in the United States the 100 point system that Robert Parker popularized and many others use dominates in part, I suppose, because that’s how our papers were graded in school. Any simple wine scoring system is problematic, however, since a good deal of information is necessarily lost when the attributes of a multidimensional product like wine are reduced to a single number. Wine isn’t like gasoline, where the critical components can be captured, like octane, in a single number.

But there are other problems, too. Paul Gregutt (PG), wine critic for the Seattle Times and Wine Enthusiast magazine, explained the limitations of the 100 point scale and the tendency toward “grade inflation” in his recent book, Washington Wines & Wineries:

This practice of promoting wine, a multi-faceted, subjective sensory experience, simply by broadcasting numbers has gradually devalued the numbers while shrinking the original 100-point scale. At first blush, such a rating system sounds generous, allowing room for a lot of subtlety in the grading curve. But in actual practice it’s not a hundred point scale at all, nor even close.

It has become a ten point scale. Wines rated under 85 are ignored completely. Wines rated 85 to 89 must be marketed as value wines – those numbers only work for wines priced at the low end of the scale. If your wine is going to sell for $15 or more, it must hit 90 points at least. One prominent retailer even makes a point of selling (at discount) wines that have scored the “dreaded” 89. Once a wine moves up the ladder from there, it becomes increasingly rare and expensive. As a result, wines scoring 95 or above are virtually unobtainable for the average consumer.

Although the ratings are “devalued” in terms of their utility, they are also “inflated” in terms of their commercial importance. It would seem that consumers might be better served if someone would re-center the scale so that it uses more of the 100 point range and is therefore potentially (and only potentially) a more accurate guide to quality. This would obviously lower the average score, however. Who is going to be the first to break the pattern and give merely good wines average scores, 70 or 75 instead of 85 so that 85 (B+) means something?

Revising the 100-Point Scale

PG decided to try in his book on Washignton wine. Instead of rating individual wines, he rated the wineries themselves in terms of a modified 100-point scale that gives marks for style (30 points), consistency (30 points), value (30 points) and the winery’s contribution to the development and improvement of the Washington wine industry (10 points).

How did the wineries rate? Quilceda Creek, with its perfect 100 Robert Parker point Cabernet Sauvignon, also got a perfect PG score (30/30/30/10). Leonetti ranked second with 98 points (30/28/30/10). So far so good. The trouble comes further down the list where some prominent wineries get scores in the 70s, 60s, and 50s. The scores make sense when you break them down into the four factors that PG evaluates, but the raw numbers are sort of shocking when you see them for the first time or out of context. (My university students know this feeling, I suspect. It happens when they get their first college papers back after several years of high school grade inflation.)

PG writes about the reaction to his winery rating on his website in a column titled “Time to Dump my 100 Point System?”

Comments from readers and reviewers have been largely positive. Some have embraced my scoring; others have simply accepted it and moved on to the book’s other assets. But within the ranks of the industry itself – wineries and distributors in particular – there has been an awkward silence.

There is little doubt that this book’s sales have been seriously impacted by 1) the decision not to include 3/4 of this state’s wineries and 2) the scoring system itself. One winery veteran, after some prompting, took the trouble to explain why his winery wouldn’t sell or promote the book, even though I had given them one my highest scores.

“Our problem with promoting your book,” the winemaker said, “is that, in spite of the wonderful written praise, we’d spend all out time explaining our B+ grade.” PG is trying to decide if he should scrap his ratings for the next edition of his book (if you have an opinion you can contact Paul through his website PaulGregutt.com).

The First Mover Disadvantage

It is hard to know what to say about this. On one hand I admit that my first reaction to PG’s winery rating scale was neutral to negative, but then with some encouragement from Karen Wade I looked at it more closely and decided that it was actually pretty useful to me as a consumer — so I guess I am the source of some of the positive feedback PG received. On the other hand, I understand that no winemaker is going to take out an ad that boasts “Rated 72 by Critics!” — even if that’s a very good and appropriate rating by the scale being used.

I think we have to admit that re-centering the 100 point scale is a hopeless task and move on. The first mover in point reform will suffer the sort of criticism that PG reports. The only way to do it would be for everyone to switch scales at once. I don’t see that happening.

So what should we do about the ratings? For my part I’m going to try to get my students, who are very much into wine ratings by the time they come to me, to use the UC Davis 20-point scale. I think it might work because (1) they aren’t used to thinking in terms of 20 points and so they will have more open minds about what scores mean and (2) I like the way it breaks down elements of sensory perception: 4 points for appearance, 6 points for smell, 8 points for taste and 2 for overall harmony, according to my copy of The Taste of Wine by Emile Peynaud. Using the Davis scale will encourage them to make up their own minds about what they see, smell and taste. That’s a good thing.

In the meantime I think Paul Gregutt’s experience suggests both why the 100 point system should die and why it probably never will. My advice to Paul: keep the analysis in your book, which is terrific, but kiss the 100-point ratings goodbye.