Sunday, December 30, 2007

The End of Cheap Wine?

It is becoming increasingly clear that a golden age of sorts (for American wine drinkers) is coming to an end. Good quality wine has been amazingly affordable for the last several years and New World wine consumption has risen as a result.

This is changing (or has already changed, as Jancis Robinson writes in Saturday's Financial Times) and a quick look at the economics of the wine market explains how and why.

The demand for wine in the United States has increased for a number of reasons. Studies that show that moderate consumption of wine (especially red wine) is healthful gave consumers license to experiment with table wines. The existence of Two Buck Chuck (the Charles Shaw wines sold at Trader Joe's stores) and other value brands made this experimentation affordable.

The increasing emphasis on wine brands helped demand grow by making the wine purchase itself somewhat less mysterious. The wine aisle is the most complex choice space in any grocery store -- there are more options at more price points than anywhere else. Brands reduce uncertainty and so encourage consumption. The enormous success of [Yellow Tail] brand wine from Australia is testament to this fact. Costco, the nation's largest wine retailer, has used limited selection and its Kirkland Signature own-brand wine to achieve spectacular results.

The demand for wine has not just increased it has also evolved as many consumers have moved to higher quality (or higher price,anyway) and developed specialized wine expertise. Wine is more than a beverage, it is a lifestyle for many people who collect wines, take wine tourist vacations and subscribe to wine publications such as
Wine Spectator or The Wine Advocate and read the wine columns now found in many newspapers. There is a pretty steep learning curve when it comes to wine. Knowing more about wine and having more experience with it increases the pleasure that wine provides and makes further learning more efficient. In economic terms, the specific investment in wine knowledge makes the demand for wine more inelastic -- less sensitive to changes in price since buyers are less likely to switch from wine to other products or beverages where they have less expertise.

The supply of wine has also changed to create higher prices. The falling U.S. dollar has increased the cost of imported wine, which contributes to rising domestic prices both directly, as those costs are passed along to consumers, and indirectly, as higher import prices allow domestic producers to raise price, too. I don't think that we have seen the full pass-through effect of the exchange rate changes yet, so expect dollar-driven price increases to continue.

But domestic prices would have increased even without the dollar's decline. Wine buyers in recent years benefited from a global surplus of wine grapes that drove down price and pushed up quality. Faced with accumulated surpluses that sometimes amounted to a year or more of sales, winegrowers held back on expansion plans (except for hot varietals like Pinot Noir). Demand has slowly grown into the existing supply and may soon exceed it for some wine types. Falling prices due to surpluses are coming to an end and rising prices seem likely, even in Australia where drought and disease have further reduced production. The new EU wine regime, if it is effective, should further reduce wine surpluses and tighten supply.

When you combine these factors along with a few others, such as growing interest in wine in Asia, the result is a new market environment and it will be interesting to see what happens next. The latest round of wine magazines seem to take higher prices in stride.
The Wine Advocate reports that the cellar door price of California cult wine Screaming Eagle is now $500 per bottle -- if you can get some -- and a long list of wines are listed with prices above $100 or $200. Wine Spectator and the wine columnists in the Wall Street Journal and the New York Times all seem to be struggling to keep a lid on their definition of an inexpensive or good value wine -- a $12 or $15 or even $20 ceiling no longer provides much choice! You can still buy cheap wine, but the good value bargains are disappearing.

It will be interesting to see how the American wine culture, which has been built in part on good quality at low prices, copes with this new world of wine. In the meantime, enjoy those bargains and good values when you find them, but don't count on your good fortune lasting forever.

Monday, December 24, 2007

Draining Europe's Wine Lake

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

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

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

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

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

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

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

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

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

Four hundred thousand acres -- how big is that? Huge if you are thinking New World -- Australia had just 388,000 acres of vineyards altogether in 2003 according to my
Oxford Companion. But tiny if you think Old World -- and of course this is an Old World problem. Italy and France had more than 2 million acres of vines each in 2003 and France had nearly 3 million more. (The Languedoc region in the south of France has 528,000 acres by itself.) Taking 400,000 acres out of production in Europe is like removing Moldova and Switzerland from the market. The effect on the regions where the vines are grubbed up will be large, but the impact on the global market is likely to be quite small -- reducing the global surplus, but not eliminating it. I don't know if it will be enough.

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

Saturday, December 8, 2007

A Wine Research Gap?

If there's one thing that I have learned about wine markets it is that they are dynamic. Although there is much about wine that is classic and timeless, there is a lot of change, too, and winemakers and growers need to take account. Global wine markets are changing, the social function of wine is changing and the natural environment of winegrowing is changing, too.

How do you cope with a rapidly changing market environment? Innovation is one answer and that requires research. Is the U.S. wine industry doing enough to keep up with foreign wine producers in basic wine research? That's the cover story in the December issue of Wines & Vines magazine and their answer is No.

Wines &Vines is a wine industry trade journal; whereas Wine Spectator and Wine Advocate are aimed at consumers, collectors and enthusiasts, W&V's audience are industry insiders. It's a very good publication -- I rely on it for information about emerging trends in the industry. If you are seriously interested in wine you ought to take a look at it.

The cover story argues that there is relatively little public research on wine industry problems in the United States. "Public" research is research that is available to all winemakers and growers and is different from proprietary research that individual winemakers undertake for their own use. Australia, with a wine industry about half the size of the U.S., spends about $23 million for public research, with funds raised from levies on winemakers and growers matched by government funds. By comparison,
W&V reports about $2 million for public wine research in the U.S. (although total research levels are much higher when private R&D expenditures are included). The argument is that increased funding for applied research would strengthen the U.S. industry in an increasingly competitive global market.

What would increased research funding buy? I think I got a taste of what research can do in an electronic newsletter I received recently from the Australian Wine and Brandy Commission. The AWBC (a.k.a. Wine Australia) is the Australian government agency that was created in 1981 to support the wine industry. One of their current research projects involves the problem of rising alcohol levels in wine.

Everyone knows that alcohol levels have been going up for some years. Climate change is part of the problem -- warmer climate and longer growing seasons increases sugar levels and therefore alcohol levels. This is beneficial to wine quality up to a point, but beyond that point there are real problems both with wine balance and with consumer attitudes towards alcohol. How do you bring alcohol levels down without bringing quality levels down, too? Premature harvesting means less sugar and alcohol, but less character. De-alcoholization (usually through a reverse osmosis process -- did I get that right David?) is common in California and elsewhere but there are quality trade-offs here as well.

The AWBC reports that their alcohol reduction research is focusing on the yeasts -- trying to find yeast strains that will make wine with lower alcohol levels without sacrificing balance and character. They even mention the three little letters that I think everyone in the wine business is afraid of -- GMO. No genetically modified yeast varieties have been used in Australia (and are unlikely to be used there ever, thay say), but research into yeasts and even GMO yeasts is an example of the sort of public research that could have wide-ranging benefits for the wine industry. The Australians are out in front on this sort of research,
Wines & Vines suggests and it may be so. I know that I rely almost exclusively upon AWBC economic research on global wine market patterns.

The November issue of
W&V has an article on dry farming of vineyards that reminds me that innovation and research can take many forms. Once upon a time most quality vineyards were dry farmed (farmed without artificial irrigation), but as irrigation technology improved the focus turned to scientific irrigation practices. I guess the idea is that because technology allows a winegrower to carefully control water availability then this must be the right thing to do. The people who make Mollydooker, the big-boned Australian wines with the huge Parker numbers, attribute their success to the trade-marked Marquis Vineyard Watering Programme, for example.

But John Williams, whose Frog's Leap wines are also recognized for quality, has taken a different approach, going back to dry farming. He manages the vineyard soil (see photo above) so that it retains moisture effectively and encourages the sort of deep vine growth that gives character to the finished product. The W&V article explains ...

Williams pointed out that a vine grown on drip irrigation is essentially a potted plant sitting in the middle of a field, with moisture and nutrients delivered through the drip system. He believes that is a problem. "What kind of flavor do you get from a hydroponic-grown tomato? Very little. Same thing with a grapevine. When the winemaker comes out to taste the berry at 22° or 23° Brix, the flavor isn't there. So the decision is made to leave it on the vine a little longer, more hang time until it reaches physiological ripeness at 26° or 27° or even 28° Brix. You still aren't getting a lot of flavor, so you have to start manipulating the wine--micro-oxygenation and lots of oak--to try and get it to taste mature. And you end up with high-alcohol wines."

He added, "If we talk about when wine went from its historic place as a mealtime beverage that deeply reflects the soil and climate from whence it comes to killer, jammy monsters that advertise that they will 'melt your panties,' I think you will come to the same conclusion that we did 18 years ago: that the real wines are made by deeply connecting them to their soils and that dry farming is fundamental to that."
John Williams' statements suggests that dry farming, where it is practical, might solve the alcohol problem and yield other benefits at the same time. This suggests to me that, while research tends to focus on winemaking as a science (hence the search for high tech solutions), we need to remember that wine is made in the vineyard and the craft of winegrowing can yield answers, too.

Innovation -- doing new things -- is one answer to rapid change, but doing the old things more effectively sometimes works even better. Kinda makes you rethink the question of a wine research gap.

Wednesday, December 5, 2007

Message in a Bottle? The 2007 Wine Star Awards

Wine Enthusiast has announced the winners of their 2007 Wine Star Awards and I find the selections pretty interesting. Usually wine magazine awards go to famous winemakers like Robert Mondavi or Paul Draper the "philosopher/winemaker" at Ridge. But Wine Enthusiast positions itself as more of an industry publication than an enthusiast mag, so these awards are a bit different -- they honor exceptional achievement in an increasingly complex global wine market and send a message to those who pay attention about how the global market is evolving.

The top award -- Man of the Year (yes, they really call it
man of the year) -- goes to Ray Chadwick, who is not a household name unless your house is pretty deeply involved in the wine business. Chadwick has an MBA from the University of Chicago instead of a oenology degree from Davis. He runs the Chateau & Estate group of Diageo, one of the world's largest drinks companies. His achievement was to build a successful global brand portfolio of premium wines. The citation for the award says in part

Chadwick has overseen tremendous growth at DC&E, launching new brands from California, Australia, New Zealand and France, growing its wine portfolio from three brands to 21, and focusing on premium wines. DC&E’s strong California portfolio includes Beaulieu Vineyard, Sterling Vineyards, Acacia and Chalone. In the last year, it launched Newharbor (NZ), B&G Bistro (France), Beauzeaux (CA) and A by Acacia (CA). Under Ray’s leadership, DC&E began fiscal 2007 as the No. 4 premium wine company in the United States (8.7% market share), and finished the year at No. 3, with a 9% market share. With sales of 5 million cases a year, at a retail value of $1 billion, DC&E is one of the 10 biggest U.S. wine companies. But beyond the astonishing numbers, Chadwick has helped build an engaged and dedicated team. As an insightful strategist and superb administrator, he has repeatedly met and mastered an enormous challenge: to bring together different corporate cultures, successfully merging Diageo, Seagram’s, and finally Chalone, providing a collaborative and winning environment.
This says a lot about what the wine industry in the U.S. and the world. First, the award stresses the importance of marketing and distribution in today's market environment. Second, although the trend towards consolidation continues, the premium wine segment is still pretty open -- the third largest firm has just 9% of market share. Third, it stresses that fact that having a diversified international portfolio of premium wines is of growing importance. Retailers like to deal with a small number of suppliers, so successful distributors must have products that will fill a lot of different spots on the wine rack. And finally, the stress on team building reminds us that this is still a people business. Personal relationships and trust are necessary in a business where you don't always know what's in the bottle you are selling.

Several of the other awards also make interesting statements about the wine business today. The Importer of the Year is Gallo, which we all think of as company deeply rooted in California's Central Valley (and now Sonoma, too, of course). But wine is a global business and so Gallo has become global, too. The citation explains

The importing side of the business began in 1997 with Ecco Domani Pinot Grigio from Italy, a company which Gallo started from scratch. It was one of Ernest Gallo’s ideas, and a fairly radical one, considering the company’s exclusive focus up to that point on California wines. The company currently imports 15 brands from 11 wineries in nine countries: France, Italy, Spain, Germany, Chile, Argentina, Australia, New Zealand, and South Africa. Of these, seven were created, while the other eight represent partnerships.
Gallo is a master of brand management. Gallo's emphasis on expanding its imports (and exports, too, although that's another topic) underlines the point that a diversified portfolio of international brands is the dominant competitive strategy today.

But global markets don't necessary spell the end of regional family wine firms. They can survive and even thrive, but they have to evolve along with the market. Two other Wine Star awards recognize achievements in this vein.

DFV Wines (Delicato Family Vineyards) was named the American Winery of the Year for its successful portfolio of California brands. The citation reads
DFV Wines is a family-owned winery committed to its 80-plus-year wine heritage in California. Three generations of the Indelicato family have overseen vineyard operations and winemaking, and produce a portfolio of wine brands from their various properties. Originally a top quality supplier of grapes and bulk wine, in the 1990s they moved into bottled varietals; they currently offer 9 different brands, which appeal to a wide range of consumers. In the late 1980s, the family purchased the 12,000-acre San Bernabé Vineyard in Monterey, and in the 1990s they added Clay Station vineyard in Lodi, and North Coast vineyards in Napa and Sonoma. The Indelicato family has earned a reputation for maintaining the highest standards in farming, with an unwavering dedication to environmentally sensitive winegrowing practices and economically sustainable business practices. Individual wines that have gained recognition in recent years include Gnarly Head Zinfandel, Clay Station Viognier, Irony Pinot Noir and Chardonnay, 337 Cabernet Sauvignon and Delicato Shiraz. DFV Wines answers consumer demand for great tasting, mindfully grown, intelligently vinified wines for every occasion
The New World Winery of the Year is one of my personal favorites, Villa Maria. The citation reads
Villa Maria is one of New Zealand's leading wineries. It was founded in 1961 by its current owner and Managing Director, George Fistonich, and is 100-percent New Zealand—and family—owned. The company’s primary focus is on the vineyards themselves,to produce the highest possible grape quality, while respecting the importance of regional differences. Astute site selection is followed by superior vineyard management and then complemented by expert winemaking. Villa Maria is also known for its innovations in its native country: a tiered system of payment for grape growers based on the fruit quality and the creation of reserve and single-vineyard wines. Under Fistonich’s leadership, Villa Maria also became the first major wine company in the world to declare its wineries “cork free,” opting for screw cap closures on all of its wines. Through his ceaseless pursuit of quality, Fistonich and Villa Maria have made outstanding contributions not only to New Zealand wines, but also to the wine world in general.
Villa Maria shows that it is possible for a family-owned winery in what must still be considered an "emerging" wine region to achieve international success without a huge brand portfolio or multinational money -- through a stubborn and consistent commitment to quality. Villa Maria's success comes from a combination of good old-fashioned winegrowing (a strong focus on grapes, vineyards and growers) and an openness to innovations like the screw cap.

Congratulations to all the winners of the 2007 Wine Star Awards. And thanks to
Wine Enthusiast for using these awards to highlight important characteristics of the contemporary wine market.

Sunday, December 2, 2007

The California Bill and the Birth of Washington State Wine

I am spending this cold, wet day re-reading parts of Paul Gregutt's great new book Washington Wines & Wineries: The Essential Guide (University of California Press) and his chapter on the history of Washington wine got me to thinking about the origins of the industry. Is it possible to point to any one person or event that is responsible for the birth of Washington wine?

There are several possible choices. Some would say that it happened in 1937 when Washington State University horticulturalist Dr. Walter Clore, the godfather of Washington wine, began working in his research center north of Prosser. Dr. Clore and his team are responsible for many of the advances in Washington viticulture that we take for granted today. Without Clore and his colleagues, Washington winegrowers might still be planting Muller-Thurgau and Concord grapes.

Others might argue that Washington wine was born in 1967 when Andre Tchelistcheff, the famous winemaker from California's Beaulieu Vineyards, came to Washington and praised a Gewurztraminer made by Phil Church, a partner in Associated Vintners (now Columbia Winery). Tchelistcheff's endorsement lent credibility to Washington wine and his encouragement helped propel the industry forward. (Tchelistcheff even encouraged his nephew Alex Golitizin to make wine in Washington -- the result is Quilceda Creek Vintners, the maker of Washington's first 100-point cabernet sauvignon.)

A third important event occurred in 1976, when the Chateau Ste. Michelle winery opened at the former Hollywood Farms location in Woodinville. The $6 million winery and headquarters complex was the largest single investment in the industry to that time and it represented a great gamble by Ste. Michelle's corporate parent, the United States Tobacco Company (the makers and Skoal and Copenhagen smokeless tobacco). CSM, which was created through a merger of pioneer wineries Pomerelle and NAWICO before being purchased by US Tobacco, is now the Colossus of Washington wine, accounting for about 70 percent of all wine production in the state.

My choice for the key event in Washington wine history, however, didn't happen in the vineyards with Dr. Clore or the tasting room with Mr. Tchelistcheff or at the grand opening of the Woodinville winery. From an economist's viewpoint, the critical act (and it really was an Act) took place in March 1969. That's when the Washington legislature passed House Bill 100, the California Wine Bill. The California Wine Bill exposed the Washington wine industry to competition from both domestic (California) and international competition and forced winemakers to improve quality or disappear.

Here's the back story. Many wineries opened or reopened in Washington when Prohibition was repealed in 1933. Almost the first thing that they did was to seek protection from the state legislature from out-of-state competition. This protection was provided almost immediately in the form of the Steele Act of 1935, which set up a dual distribution system for wines. "Domestic" Washington wineries could sell directly to wholesalers, but "foreign" out-of-state wines (including wines from California) has to be distributed through the more rigid channels of the state liquor monopoly, the Washington State Liquor Board. The result was that "domestic" wines were relatively easy to purchase and widely available, but "foreign wines" including California products could only be purchased through state stores with their limited hours and strict controls. Later legislation provided for minimum prices in order to prevent competition from cheaper California wines.

The result of this protective legislation was exactly what you'd expect. With no competition to keep winemakers honest, quality suffered. The industry focused on the low end of the market, making large quantities of cheap, sweet, fortified wines like this NAWICO port. There was little incentive for winegrowers to seek quality (although some did) because good grapes and poor ones were all blended together. Although Dr. Clore was busy developing quality wine grapes in Prosser, Washington's most important grape crop for many years was the Concord grape that went into Welch's juice and Gallo's sweet sparkling Cold Duck.

Rather than thriving behind its protective wall, the Washington wine industry collapsed. There were only eight wineries in Washington in 1969 (down from 42 in 1937) and, with a few exceptions such as Associated Vintners, their wine was mediocre at best.

The paradox that protecting a wine industry actually destroys it is not unique to Washington. I have seen it time and again in my research, in New Zealand, Argentina and in France under the EU's old wine regime. The only thing that can protect a wine industry is competition, which forces winemakers to become more efficient and to raise quality.

With nothing to keep cheaper California wines out, Washington winemakers had no choice but to look upmarket. A quality wine industry emerged and has thrived -- there are now more than 500 wineries in Washington state and new ones appear every month. Washington is unusual in the wine world in that it has developed a major wine industry that is
not built upon a base of inexpensive bulk wine. Only New Zealand (which cannot compete with Australia at the bottom end of the market) and Washington can claim to have pure premium wine industries.

You can thank competition -- and the California Wine Bill of 1969 -- for Washington's status as an important producer of premium wine.

Thursday, November 22, 2007

What's Red and White and Green All Over?

The answer, of course, is wine.

Perhaps the most interesting trend that I have observed in wine this year is the growth of green wine. By green I mean wine that is made and marketed with attention to the environment (although vinho verde from Portugal can claim to be a green wine on other counts).

What drew my attention to the green wine movement was not the existence of organic wines -- they've been around for a long time -- but the variety of ways that winemakers are embracing sustainability and the environment as an integral part of their work.

I uncovered three sustainability initiatives while doing fieldwork in Oregon, for example. The first was the Low Input Viticulture and Enology initiative, or LIVE for short. This is an a voluntary program with about 70 certified members that, according to the website, aims ...

  • To see the vineyard as a whole system
  • To create and maintain a high level quality fruit production
  • To implement practices that reduce reliance on synthetic chemicals and fertilizers with the goal of protecting the farmer, the environment, and communities at large
  • To encourage responsible stewardship of the land, maintain natural fertility and ecosystem stability
  • To promote sustainable farming practices that maintain biological diversity in the whole farm

  • I haven't studied the LIVE program closely, but my impression is that it is an attempt to both promote sustainable vineyard practices and, at the same time, take local control of the certification process. Why create an organization like LIVE -- why not just go "organic" and be certified organic? I have talked to a number of winegrowers who hesitate to seek organic certification because of the considerable expense and also because the sort of sustainable viticulture they seek to practice goes beyond the avoidance of chemicals. Regional initiatives like LIVE allow groups of growers to define sustainability in a way that is compatible with local conditions and practices and to retain local control of the process.

    Some winemakers are going all the way when it comes to sustainability, which is what the biodynamic wine movement is all about. Biodynamic winemaking is based upon a set of agricultural theories that the Austrian philosopher Rudolf Steiner proposed in the 1920s. The biodynamic idea is to treat the entire vineyard as a living organism and to adopt practices that promote the health of the entire structure -- vines, soil, insects, and so forth. This reminds me of the famous Gaia Hypothesis that the whole earth is a living organism.

    Most biodynamic practices are uncontroversial, but the use of special organic field sprays draws special attention. The sprays are made by burying cow horns full of cow manure or ground quartz in the vineyard for six months and then spraying the estate with the resulting composted product in diluted form at specific times of the day and phases of the moon. The idea is to promote microbial health and the balanced growth of the vineyard. It sounds a little like voodoo viticulture, to me, but there are plenty of good winemakers who have adopted this practice so I am going to keep my skepticism in check for now.

    Several Oregon winemakers including Brick House and Cooper Mountain have gone or are going biodynamic. They join California producers including Frog's Leap, DeLoach and Benzinger and a growing number of winemakers in Europe and around the world. I understand that many winemakers in Chile such as Emiliana Orgánico are adopting biodynamic practices, for example, both on philosophical grounds and, I suspect, in an attempt to differentiate their wines in the marketplace. (Click here to read Emiliana's explanation of the principles of biodynamic viticulture). I haven't tasted enough biodynamic wine to have an opinion about how the process affects the end product.

    The final example from Oregon is the Carlton Winemakers' Studio, a facility that about a dozen smaller winemakers share. This operation was designed to meet recognized environmental standards from the group up. According to the website it was ...

    The first winery registerd with the US Green Building Council, The Carlton Winemakers Studio was designed to be compliant with LEED (Leadership in Energy and Environmental Design) certification, promoting a whole – building approach to sustainability by recognizing five key areas of human and environmental health: sustainable site development, water savings, energy efficiency, materials selection, and indoor environmental quality.

    Some of the most intriguing environmental building materials and techniques are the following:

    • Below foundation water capture and reuse
    • North roof water capture and reuse
    • Clear roofing materials
    • Daylighting, windows, doors, and hallway
    • Night air cooling
    • Coal byproduct (fly-ash)/concrete mix
    • Recycled mats, paint, office desk materials, roofing metal, carpet
    • Non-conventional material uses: sals-walls, curtains, shade
    • Reused: counter tops (SS & acid resistant composite), light, concrete, sinks
    • Dynamic flow air pocket walls
    • Earth berm / below grade walls for natural cooling
    The Winemakers Studio's strategy suggests that green wine can be good wine, good economics and good for the environment.

    Sustainability is obviously important in winemaking, but it doesn't end there. A growing number of wine brands, such as French Rabbit, are embracing sustainability in wine packaging and transport. Here's how Boisset America, the French firm that makes and markets French Rabbit (and owns biodynamic DeLoach) got into the sustainable packaging business.

    Canada is a good market for wines, especially French wines, and the Liquor Control Board of Ontario is therefore a big buyer with lots of market power. As a state monopoly, the LCBO sets economic, social and environmental goals for its operations. They aim to minimize energy use and maximize recycling. LCBO challenged their wine suppliers to introduce new products to promote these goals and French Rabbit was one result. As Patrick Egan, brand manager for French Rabbit, notes
    "Our real immense success was with Liquor Control Board of Ontario. They inspired the creation of French Rabbit. As a goverment entity they were interested in challenging themselves and their suppliers to reduce packaging waste. They set an ambitious goal of eliminating 10 million kilograms of packaging waste per year. There were no other wines yet available in Tetra Paks when we presented French Rabbit, and they immediately embraced the concept. FR was the most successful launch of a new brand they've ever had, and spawned more than 75 other wines in Tetra Pak packages since French rabbit was launched there in July 2005. The success helped the LCBO reach their packaging reduction goal some 2 years ahead of schedule. Here in the US, there are really 3 primary brands [in Tetra Paks] so far, with more on their way.
    "Turns out, much of the world has been consuming wine from the Tetra Pak package for many years (you must have seen Tavernello on your travels to Italy). Our angle, our raison d'etre, for introducing a new wine in this package to North America has been the ecological benefits to the package. In the age of global warming and increasing interest in sustainability, our package has the benefits of the lowest carbon output per unit of wine sold when the full life cycle of the package is considered. Its lightweight and minimal packaging materials mean immense savings when compared to the glass bottle. So, as wineries make more and more efforts to combat global warming in the vineyards and in their energy consumption, we've gone the angle of actually transforming the package that wine is delivered in to consumers. Just as globalization increases choice for consumers, it also means more and more wine is shipped all over the world. Ours dramatically reduces the impact when wine is shipped, in addition to the savings generated when the package is produced and the package is recycled."
    It seems to me that the wine industry is ahead of the curve with respect to sustainability and the environment. Wine is a product of nature, after all, and there are special reasons, aesthetic, philosophical and economic, why winemakers should wish to emphasize that connection. Green wine, I predict, is here to stay.

    Sunday, November 18, 2007

    The French Connection

    Watching Jonathan Nossiter's film Mondovino gives the viewer the impression that the world of French wine is being overrun with Americans and modern American wine influences. Maybe that's true, but if so it is only half the story. Herewith three stories of French wine and wine-makers in America inspired by recent conversations with former students (thanks to Jeremy, Devin and Patrick for your help).

    Story 1: Pinot Noir is a hot wine in the United States -- the Sideways phenomenon continues for now. The best-selling Pinot Noir in American is called Redwood Creek. Have you seen it? Redwood Creek is a popularly priced Gallo brand; the label says that the wines are "inspired by the Frei Bros. 100 Year Old California Winemaking Tradition."

    "Inspired" is a good word to use here because, although the brand reflects California tradition, the wine itself is from France. The label says "Product of France" and "Vin de Pays D'Oc." So it doesn't come from California's Central Valley, as you might expect from a Gallo product, but France's equivalent, the vast vineyards of Languedoc.

    I expect that many American supermarket shoppers who would never have had the confidence try to pronounce "vin de pays d'oc" much less spend money on some of its wines will be happily opening bottles of Redwood Creek Pinot Noir this Thanksgiving. Moral of the story: American consumers will buy French wine if it is presented in a familiar, understandable way, which in this case means as a branded varietal wine.

    Story 2: I gave the faculty toast to our Phi Beta Kappa graduates at a luncheon last May and I was surprised to discover afterwards that the sparkling wine we drank came from New Mexico of all places. It was called Gruet and I was further surprised to find some of it on the neighborhood Metropolitan Market shelves.

    Gruet et Fils is a prominent French Champagne house, founded in 1952. Champagne is a good business, but a difficult one, too, for an entrepreneur. The business is highly regulated and expansion opportunities are strictly limited. Vineyard yields and locations are tightly controlled. If you want to make more Champagne to take advantage of market conditions, well basically you can't. But you
    can make more Champane-like product, Methode Champenoise sparking wine, if you invest in vineyards outside the Champagne region. It won't be Champagne, of course, and won't earn Champagne's price premium, but people will buy it if it's very good.

    Members of the Gruet family were therefore vaguely searching for vineyard expansion opportunities when they were passing through the American Southwest in 1983. They ran into some fellow European winemakers who were trying to make a go of it in New Mexico and, inspired by their example, ended up planting vineyards at elevation 4300 feet near the town of Truth or Consequences, about 170 miles south of Albuquerque. The winery equipment was shipped over from France along with members of the Gruet family to make the wine and, in due course, a first vintage (1987) was released.

    Today Gruet produces more than 80,000 cases of American sparkling and still wines in New Mexico, which must make them the state's largest producer. Prices run from about $13.50 for the basic sparkler up to nearly $50 for limited release wines -- prices that are significantly lower than for equivalent Champagnes. Moral of the story: Americans will buy French-style wines from unexpected places if they are good, which the Gruet wines are, and a good value.

    Final story: Boisset, Vins et Spiriteux is a major French wine and spirits company. Founded in 1961 by Jean-Claude Boisset, it has evolved into a a top-five producer in France, exporting to more than 80 countries with investments in California (DeLoach Vineyards), Italy, Spain, Uruguay, South Africa and Canada. Their French brands include J. Moreau & Fils (Chablis), Bouchard Aine & Fils (Cote de Beaune) and Louis Bernard (Rhone Valley), all of which are sold in the United States.

    But Boisset America's big push at the moment is a wine called French Rabbit. Like Redwood Creek, it is wine from Languedoc. Unlike Redwood Creek, however, it doesn't pretend to be inspired by anyone's tradition, either French or Californian. It is designed to appeal to modern consumers who want to make wine part of an active, informal, sustainable lifestyle. That's why it is packaged as you see it here, in lightweight eco-friendly octogonal-shaped one liter Tetra-Prisma containers (and 250-ml single-serving untis, too).

    (The wine on the left, Yellow Jersey (think
    Tour de France) is another Boisset America brand. It comes in a PET plastic bottle and will fit in your bicycle's water bottle holder.)

    Is the world ready for wine that looks like this? A lot of my friends cling to tradition, unwilling even to give up corks for screw caps. Will they accept wine in what appears at first glance to be an orange juice carton? Apparently so -- Boisset America sells more than 100,000 cases of French Rabbit in the United States and Canada and is now introducing the innovative brand into what must be the most traditional possible market, France itself. (Watch for an upcoming post about how French Rabbit and its unorthodox packaging was born).

    Moral of the story: French wines can succeed outside of France because of the creativity and entrepreneurship of French winemakers. Who knew?

    Tuesday, November 6, 2007

    Wine Economists Unite!

    You may or may not be surprised to learn that there is an organization called the American Association of Wine Economists. It's headquarters are at Whitman College in Walla Walla, Washington, where Karl Storchmann teaches wine economics.

    The Association publishes the
    Journal of Wine Economics, which features interesting articles covering a range of wine economics topics under the direction of a most distinguished editorial board: Kym Anderson (University of Adelaide and World Bank), Orley Ashenfelter (Princeton), Victor Ginsburgh ( Université Libre de Bruxelles), Robert N. Stavins (Kennedy School of Government, Harvard) and of course Karl Storchmann.

    The Association's first annual meeting took place last year in Trier, Germany (click to view a pdf of the conference program). Karl aims to bring the meeting to Portland, Oregon this summer, probably in mid-August. Check out the links to the Association and the
    Journal if you are interested in how economists apply their technical tools to the analysis of wine markets.

    The University of Wine

    I teach at the University of Puget Sound, one of the northwest's finest liberal arts colleges. But as I work on my book about globalization and wine I'm starting to think of UPS as the University of Wine (or maybe the University of Pinot & Syrah to preserve the UPS acronym).

    It's not that we teach a lot of classes on wine or winemaking (the course I will teach next fall will be the first), it's just that so many of our graduates end up making wine, selling it, or telling stories about it. Must be something in the water ... or in the wine. Herewith a selected list of alumni wine people.

    Winemakers and Winegrowers
    Dick Boushey, Boushey Vineyards, Yakima Valley, Washington

    Tom Hedges, Hedges Family Estate. Red Mountain, Washington

    Peggy Patterson, Hoodsport Winery. Hoodsport Washington

    Chuck and Tracy Reininger (pictured above), Reininger Winery. Walla Walla, Washington

    Michael Corliss, Corliss Estates. Walla Walla, Washington

    Stewart Boedecker, Boedecker Cellars. Carlton, Oregon.

    Joe Davis, Arcadian Winery. Santa Ynez, California.

    Warren Moyles, La Toscana Winery. Leavenworth, Washington

    Julie Strobel Arger, Arger-Martucci Winery. Napa Valley, California

    David Rosenthal, Enologist, Chateau Ste. Michelle. Woodinville, Washington

    Carolyn Lakewold, Donedei Winery. Olympia, Washington

    Mona Hovnanian, Arbutus Winery. Seattle, Washington

    Wine Families (wineries of parents of Puget Sound students)
    Fielding Hills Winery. East Wenatchee, Washington

    Frog's Leap Winery. Napa Valley, California.

    Tres Sabores Winery. Napa Valley, California

    Pepper Bridge Winery, Walla Walla, Washington

    The Wine Business: Marketing and Distribution
    Ken Avedisian, Chief Operating Officer, Cordon Selections wine distributors. Seattle, Washington.

    Jeremy Soine, Brand Manager, Barefoot Cellars. Modesto, California.

    T. Patrick Egan, Brand Manager (aka Chief Hare), French Rabbit Wines. Sausalito, California.

    Devin Visciano, Monterey Bay Wine Company. La Selva Beach, California.

    Authors and Educators
    Michael Moyers, Instructor of Wine Science, Walla Walla Community College and Winemaker, College Cellars of Walla Walla

    Amy Muma, World Wine Program, Central Washington University. Ellensburg, Washington

    Cynthia Nims, Food and Wine Writer and Consultant. Seattle, Washington

    Michael Veseth, Professor of International Political Economy, University of Puget Sound. Tacoma, Washington
    As you might expect, wine research is filled with good experiences. One of the unexpected pleasures has been the opportunity to reconnect with exceptional alumni and former students who are in the business.

    Sunday, November 4, 2007

    Washington Wines & Wineries

    Seattle wine writer Paul Gregutt's new book Washington Wines & Wineries: The Essential Guide has just been published by the University of California Press. It is the kind of wine book that brings immediate pleasure and promises to be a useful companion in the future. I especially appreciate Gregutt's sense of history. Knowing history always helps me make better sense of what I see today.

    The book is organized into three sections. The first provides background in the form of brief surveys of the history of wine in Washington, the AVAs, the grape varieties and the top ten vineyards. The chapter on grapes explains where and how each varietal fits into the Washington wine puzzle and a brief list of "best bottles." This is just about only place in the book where Gregutt (hereafter PG) ranks individual wines, which is fine with me. There are lots of places to go for wine ratings and rankings (including PG's own blog at and a book is actually the wrong place to do this because of the dynamic nature of the wine market and the less-than-dynamic time frame of book publication. Lots of interesting and useful information is presented here in a lively style.

    The second section provides usefully detailed descriptions of more than 100 Washington wineries (out of the 500+ wineries currently producing). An innovation here is the use of a 100-point scale to rate the wineries (not individual wines). PG rates each producer according to style (30 points), consistency (30 points), value (30 points) and its contribution to the development and improvement of the Washington wine industry (10 points). Everything about this rating system is subjective, of course, but I find it interesting nonetheless (although I must admit that my first reaction was not so favorable -- Karen Wade encouraged me to take a second look at it and I am glad I did). Consistency and value in particular are two factors that are important to wine buyers but that do not always show up clearly in the rankings of individual wines. A reputation for consistency and value is a good thing.

    The top winery in Washington? Quilceda Creek, with its perfect 100 Robert Parker point Cabernet Sauvignon, also gets a perfect PG score (30/30/30/10). Leonetti ranks second with 98 points (30/28/30/10). Columbia Crest, a volume producer, earns a surprisingly high 92 points (26/26/30/10), reflecting its good value and all that it (and Chateau Ste Michelle) have done to promote Washington wines in general.

    The part of the book that is most directly relevant to this blog comes at the end, when PG considers the future of Washington wine, asking some pointed questions to industry leaders including Ted Baseler of Chateau Ste Michelle, Bob Betz, Tom Hedges, Allen Shoup and David Lake. One of the questions is, how well do Washington wines compete in the global marketplace (and how can they do better)? Here is summary of some of the responses:

    1. Although Washington wines are currently exported to 40 foreign countries, the export market is not yet very significant. Most Washington wine is sold domestically.

    2. Profit margins on exports are lower than on domestic sales, so at this point exports are done either for personality satisfaction (the ego factor) or as part of a long term market development strategy. There are good economic reasons to privilege domestic over foreign sales now, although that could change in the future as competition for the U.S. market intensifies.

    3. It is difficult to sell Washington wines abroad because no one really knows that they are. Are they like California wines (in which case, why not just buy California wines and be done with it)? David Lake says that he tells people that Washington wines are as different from those from California as New Zealand wines are from Australian products. I think that comparison is both valid and persuasive, but ...

    4) Foreign consumers generally don't know when they are buying a Washington wine because the bottle doesn't say
    Washington except in fine print on the back. New Zealand wines, on the other hand, typically say New Zealand clearly on the front label. New Zealand wines systematically reinforce a regional identity; Washington wines do not.

    The source of Washington wines is usually listed by AVA: Columbia Valley, Yakima Valley, Red Mountain, and so forth. You and I might know that all these wines come from Washignton, but a British supermarket customer or Japanese restaurant patron probably doesn't. The AVA system that individual wineries use to differentiate their products from others in Washignton makes it more difficult for Washington wines in general to develop a clear identity of their own -- the sort of identity that's needed for successful global market penetration.

    5) New Zealand's success in the global wine market is clearly on everyone's mind. New Zealand's growth was made possible by the exceptional quality of one wine: Marlborough Sauvignon Blanc. That wine opened doors around the world for
    all New Zealand wines. That's what we need, several of the experts say, we need one distinctive Washington wine that we can promote aggressively. That signature wine will carry the rest of the industry into the global market.

    Yes, yes, but
    which wine? Jancis Robinson famous said that Washington Merlot is as good as it gets for Merlot, but so what? She didn't seem to think that you could build a global market identity on the back of merely Merlot. (She doesn't have much that is good to say about Chardonnay, either. Don't get her started.)

    6) So what wine
    will it be? Winemakers who have already invested a lot in establishing an identity for their products are unlikely to want to shift attention to a different varietal, AVA or designation in order to help establish an Washignton State Wine brand that is of uncertain value to them. Hard to imagine that a consensus will be easily reached.

    So maybe it will be left to the market to decide. I think that's how it actually happened in New Zealand.

    It would be ironic if Washington's special wine turned out to be Riesling, the varietal on which the industry was built in the 1970s and one that is experiencing a market renaissance today (Riesling is Jancis Robinson's favorite wine, I think). Washington is the world's largest producer of Riesling wines, but they don't get much respect here compared with red wines, even though some of them are very good. (Hmmm. The Germans who make great Riesling prefer to drink red wines, too.)

    Maybe Riesling is
    it and we just haven't realized it. It would be ironic if Washington winemakers and consumers were the last to know what the region's signature wine really is!

    Saturday, November 3, 2007

    Internet Wine Scams

    The internet has done a lot for the global wine industry. It promotes the diffusion of useful marketing and research information, facilitates wine tourism, promotes professional collaboration, and helps individual winemakers and regional groups to establish distinct market identities. Many winemakers and winesellers rely upon internet contacts for a good proportion of their sales. If you are reading this blog entry, chances are that you get a lot of your wine information over the internet, too. It's a good thing, for the most part.

    But not everything about the internet is good for winemakers. Do you remember the old New Yorker cartoon with the punchline "On the internet nobody knows you're a dog?" On the internet we are who and what we pretend to be. Obviously wine marketers can use this fact to tailor the imagine of their wines and winemakers. Nothing surprising there. But, as I have recently learned, there are some predators out there who use the internet to try to take advantage of wine producers.

    Karen Wade, who owns the Fielding Hills winery with her husband Mike, recently sent me an email that she received from someone posing as a wine buyer, writing under the subject heading, "I Need Wine for my Birthday Party."

    My name is Robert Peter, an American .
    I live and work here in Seoul, South Korea.
    Actually when I was around last year for chistmas holiday, I got a a bottle of of one of your wines from a friend and i love the taste .since then , I been planning on getting your wines for my birthday party ...coming up third week of novemebr here in Seoul, South Korea.
    I will be making my payment via my American based credit card .
    You are not shipping the wines ....The wines will be picked up at your winery by a licensed shipping agency .This shipping agency have all the appropriate exportation documents and permits .
    I got your contact thru your website and I want to know if you will be able to supply me some cases of wines for my upcoming birthday .
    Concerning the shipping of the wines , I will refer you to a shipping company that will come for the pick up of the wines in your winery once I have made my payment .
    Kindly get back to me so that I can make my orders .
    Robert .

    Karen writes that

    Mike and I receive almost weekly, very official emails from places in Asia wanting to buy wine. They always offer to pay by American credit card and promise to have the wine picked up by their shipper. I answered once and told them to fax me the credit card info and order and never heard anything back.

    I guess this indicates that the sort of people responsible for those bogus Nigerian email scams have now become more specialized, targeting wine producers. I wonder if anyone has fallen for this? Have any other winemakers received these emails, or are the Wades just lucky? Do other businesses received specialized scams like this?

    On a related note, Mike and Karen Wade received good news this week in the 2008 edition of Tom Stevenson's Wine Report, one of the best annual guides to global wine. Paul Gregutt, the Pacific Northwest contributor to this volume, rated their winery as the number one "new and up-and-coming producer" in the region. He also listed the 2004 Fielding Hills Cabernet Sauvignon as number four on his list of the ten "greatest quality" wines. That's high praise for Fielding Hills.

    Paul Gregutt has a new book out about Washington wines and wineries. I'll be posting a review of it later this week.

    Thursday, November 1, 2007

    Wine, Branded Wine and the Market for Lemons

    I have learned that many people who visit this page are searching for an answer to the question "why are brands so important in the wine market today?" (When I Googled that question this morning, this blog was #3 on the results list). So maybe I should address the question directly.

    It is true that wine brands are a significant factor in the market. The largest wine companies in the world -- Constellation Brands, Foster's, Gallo -- manage large brand portfolios. Just as a mutual fund tries to cover the bases with a diversified mix of investments, the wine giants try to cover the market with a collection of brands of different types of wine from different continents at different price points. Just click on one of the company links I've inserted to see the brand lineups for yourself. They are really quite spectacular in terms of the number and diversity of wines that these companies produce and distribute.

    The emphasis on brands isn't limited to the largest companies. Just look at the brand portfolio of the French firm Broisset, for example, or Ste Michelle Wine Estates. Precept Brands is a good example of how a relatively small regional wine company can successfully assemble a global wine portfolio -- their wines come from Washington, California, Australia, New Zealand, France, Italy, Spain and Germany. Don Sebastiani and Sons is another good example of the global wine portfolio model.

    So why are branded wines suddenly so important? Well, the first thing to recognize is that wine branding (and even portfolios of branded wines) is not a new phenomenon. Although people tend to associate the branding trend with New World wine, especially U.S. and Australia, in fact the Europeans inventing the system and in some respects are still masters of it.

    Branding is really all about product differentiation -- establishing a product identity that stands out in the marketplace. The European appelation system was invented to accomplish this goal. The local and regional classifications that make marketing European wines in the New World a nightmare were invented to be powerful brands (and some of them still are). The difference, of course, is that those brands were created by regional grower cooperative wineries in an attempt to differentiate their wines from those of other regional producers, whereas these brands (Yellow Tale and the like) are created by wine businesses that specialize in selling wine, not making it -- in marketing not viticulture.

    Globalization has been part of the shift in brand strategy. As the global market expands and brings in new consumers, the company-based branding system is simply more successful than the old geography-based grower-driven branding system because it is easier to understand and promote. It gives wine to consumers who are accustomed to purchasing branded products in a format that they can easily understand.

    It seems to me that the French, who famously reject the idea branded products in their anti-globalization rhetoric, are in fact the most successful practitioners of the branding art. If you think of Champagne and Beaujolais as brands, which they are, and not just regions or styles of wine, this becomes instantly clear. Beajoulais Nouveau, the ultimate Coca Cola wine, was purposefully developed as a global brand. And of course, such French firms as LVMH are the most successful purveyors of branded luxury products, including wine, in the world.

    Brands are nothing new and they are more than just a marketing tool. Brands can serve a very useful economic purpose. The Nobel Prize winning economist George Ackerloff wrote about the problem of making a purchase under uncertainty in a famous paper on "the market for lemons." Buying a used car, for example, is difficult because it is hard to tell if a particular vehicle is a "lemon." Some cars, even by reliable manufacturers, are simply plagued by problems and it is not in the seller's interest to disclose this fact. So when you buy a used car, you have to accept the risk that you might be buying a lemon. This uncertainly drives down the price of all used cars, according to Ackerloff, even the good ones. There are a variety of solutions to this problem, many of which are techniques for the seller of a non-lemon to communicate this fact to buyers, thus differentiating good cars from bad and gaining a higher price.

    Do you see where this is going? Although I have never tasted wine made from lemons, I have drunk a lot of lemon wine in my time. The fact is that some wines or some vintages are lemons and cannot be sure if you have a lemon until you open the bottle. Solution? Well, the whole wine rating industry exists because of the lemon wine problem, doesn't it? Robert Parker and Wine Spectator play the same role for wine that Consumer Reports does for cars and washington machines.

    Brands are another solution to the lemon problem. If brands represent a reliable indicator of quality or consistency (these are not always the same thing), then they communicate valuable information to buyers, who are seeking that knowledge. Result (if successful), more confidence among wine drinkers and a higher overall demand for wine. With the market demand for wine growing and becoming more complex in the New World, the value of brands has increased correspondingly. That said, I do not think that some of the hundreds of new brands I have seen really mean anything or communicate any useful information to buyers. There is a brand boom going on, in my opinion, which I suspect will be followed by a brand bust. Keep your eyes open for bins of discounted wine from discontinued brand lines.

    One final reason for rising importance of wine brands is distribution. I have noticed that every industry tends to organize itself around solutions to its biggest bottleneck -- the factor that represents the biggest impediment to efficiency. Distribution is the biggest problem in the United States and some wine makers solve this problem by becoming distribution machines (that's part of the Gallo story) and some distributors have become turned into winemakers, either directly or through strategic alliances (that's part of the Yellow Tail story).

    Here, very briefly, is the distribution story. Retailers prefer to deal with a small number of distributors in each product category, so size matters in distribution. On the wine aisle, these distributors need to provide product at several different price points (because retail wine buyers purchase by price more than any other factor) in a large number of different categories (think of all the different varietals and regions to cover) -- and do it in a way that will reduce consumer uncertainty not increase it, reducing the lemon fear and increasing sales. Brands address the lemon issue, and portfolios of brands are necessary to provide provide wines in different categories at each critical price point and to create the breadth and scale that retailers seek. The distributors what can do this the best become the leading wine companies.

    Sunday, October 28, 2007

    Chateau Ste Michelle

    I gave a brief talk to a university group at Chateau Ste Michelle in Woodinville, Washington yesterday and it gave me a chance to think at bit about the Washington wine industry in general, now with more than 500 wineries and growing, and Chateau Ste Michelle (CSM) in particular.

    Sue and I were fortunate to be able to spend a couple hours in the afternoon with CSM Enologist David Rosenthal (pictured here) , who is a 2001 marine biology graduate of the university. He's worked at Mondavi as a chemist and at Oregon and Australia wineries and he now helps make the white wines at CSM. They produce about 400,000 cases of Chardonnay and 750,000 cases of Riesling in addition to smaller amounts of other white varietals. It is quite an operation and David was nice enough to answer all of our questions and take us through the cellar room, sampling wines starting from unfermented juice that had just arrived from Eastern Washington on through the various stages of fermentation and aging. I learned a lot -- thanks, David.

    I've read that CSM uses its large scale wisely, treating size as a resource that permits experimentation and diversity, and I could see this pretty consistently through our tour with David. CSM's scale is tailored to give its winemakers a great deal of choice when it comes to blending their high volume wines and also to facilitate limited production products, including of course the single vineyard bottlings.

    Chateau Ste Michelle is part of Ste Michelle Wine Estates (SMWE), which owns several other Washington brands, including Columbia Crest, Snoqualmie, Domaine Ste. Michelle (sparkling wines), NorthStar (which began as a high end merlot specialist label), Red Diamond, Stimsom Estates Cellars (up-market jug wines), 14 Hands (the manditory critter wine -- the critter on the label is a horse that stands 14 hands high) and the boutique Walla Walla producer Spring Valley Vineyard. If you've been reading this blog you know how important brands are in the wine market today and SMWE's strategy reminds me of the old Robert Mondavi company -- to have competitive brands from the popular premium shelf on up to the icon level, leaving the low margin bulk wine market (the bottom shelf) to Gallo, Yellowtale and Charles Shaw. CSM and Columbia Crest are the leading brands, with 3 million cases produced between them.

    Although everyone associates CSM with Washington, the company's reach is much broader. Other brands in their stable include Erath (Oregon), Villa Mt. Eden and Conn Creek (Napa Valley) and Distant Bay (Monterey). They are the exclusive U.S. distributors of Antinori wines and have partnerships with both the Antinori family (to produce Col Solare, Washington's answer to Opus One) and, with the Mosel's famous winemaker Ernst Loosen (to make Eroica, an exceptional Riesling). SMWE is the largest producer of Riesling wines in the U.S. and possibly in the world! Together with the Antinoris, SMWE recently purchased Stag's Leap Cellars in Napa Valley, one America's most distinguished wineries.

    In other words, this is big business, both in terms of volume and quality. Altogehter SMWE's brands produce 4 million cases a year, which is about two-thirds of all Washington wine, and it is a correspondingly huge influence on the whole industry here. Of course, Washington is still tiny, in quantity terms, compared to California. People say that Gallo produces about 70 million cases all by itself. (Since Gallo is family-owned, it doesn't report as much data as publicly-traded wine producers do, so we have to guess what's going on in the big warehouses in Modesto.)

    SMWE makes a lot of very good wine, which is perhaps more important that quantity in today's market. SMWE's brands account for the largest number of Wine Spectator 90+ wines (and the most total top 100 wines) of any producer in the world. It is an interesting fact that Washington doesn't compete at all at the very bottom rung of wine ladder -- the very inexpensive bulk wines that account for much of the total volume in today's market. You know what I am talking about -- Two Buck Chuck and the lesser wines that make that brand look so good. Of all the New World wine regions, only Washington and New Zealand have been able to build a wine industry from the popular premium level up.

    But it makes sense: Washington cannot hope to compete with California's Central Valley producers when it comes to cost-sensitive bulk wines, so it doesn't try. New Zealand is in the same position with respect to Australia. In both cases, I believe, this actually works to the smaller, higher-cost producer's ultimate benefit, since all of the focus is on quality and on the growing upper-tier of the market.