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Washington and Oregon Wines in London

There is a special tasting of Washington and Oregon wines in London today, held at the Institute of Contemporary Arts at 12 Carlton House Terrace. More than 190 wines from 40 Pacific Northwest wineries are being sampled. Marty Clubb of L'Ecole 41 in Walla Walla is leading an educational seminar about the Washington wines and Howard Rossback of Firesteed is doing the same for the Oregon products. The event is funded in part by a $200,000 federal trade grant. I believe it is the largest organized effort (so far) by Northwest winemakers to break into the European markets. It will be interesting to see if this seedling can grow to bear fruit.

Washington and Oregon are important winemaking regions, of course, but their reputations and sales are concentrated in the United States. Although Oregon Pinot Noirs are always included in the discussion when people anywhere talk or write about new world Pinots, the fact is that not much of it is sold abroad. Oregon wine sales in the UK and France were just over 2000 cases in 2006, for example, out of total production of 1.6 million cases. The word may be out around the world about Oregon wines, but wine distribution and sales haven't followed -- yet.

I don't have figures for Washington wines, but I suspect that the situation is more or less the same. Washington makes excellent wines (better than Oregon wines, if you judge by the Wine Spectator and Wine Advocate ratings, where several Washington wines receive 95+ points), but so far Washington doesn't seem to have that one distinctive wine that could establish an international reputation. The state is too varied, I think, in terms of climate and geography for that to happen. Washington is Riesling country, judging by volume of production, but it hasn't yet established an international reputation with this wine (although it is trying to do so with the Riesling Rendezvous conference). A variety of reds do well here, including both the Bordeaux and Rhone varietals, but no signature style of wine has emerged as the champion. Marty Clubb is telling the people in London that Washington has the ideal climate for wine (that's the official Washington wine theme), which may be true but doesn't really define the product for confused international buyers.

Washington does have one advantage over Oregon in the export market: distribution muscle. The Washington wine industry features a few very large players that have the financial clout to potentially open up foreign distribution channels. Money is necessary; it isn't easy to establish a brand abroad in this crowded market and margins on exports are necessarily lower than for domestic sales, at least at the beginning. I have read that export sales by small scale winemakers are "vanity" projects and there may be some truth to this. That doesn't mean it's not worth doing, however.

The Chateau Ste Michelle family of wines have penetrated some European markets. I was surprised to discover a large display of CSM wines in an upscale supermarket next to the train station in Riga, Latvia, for example. I haven't been able to find out how the wines got there yet -- my guess is that CSM's deal to distribute Antinori wines in the U.S. may be reciprocated by Antinori in Europe but I don't really know. Other Washington wines including Columbia, Covey Run and Hogue are part of the Constellation Brands portfolio, which may aid in their international distribution, too.

The London tasting isn't the first effort to get Northwest wines attention in the UK. I remember being in London in about 1990 and walking into Fortnum and Mason only to be shanghaied by an excited clerk who was directing anyone she could to a lonely wine tasting display where they were sampling wines from Hogue Cellars of Yakima. Needless to say, no one had any idea where Yakima was located, but they were amazed that such a unlikely place could produce good wine. Today's London event is a much larger project than that Fortnum display, but the goal is much the same, to make friends, establish relationships, and get our foot in the door.

I hope the London tasting goes well. Many of the wineries are apparently looking for UK distribution, which makes sense. The UK is the most important wine market in the world. It is a good market to sell wine and to establish a worldwide reputation. A disproportionate number of the world's leading wine writers and experts are based in London, including Jancis Robinson, Oz Clark, Michael Broadbent and Steven Spurrier. A good word by any of these celebrity wine critics would encourage wine enthusiasts in the UK and around the world to give Northwest wines a try. But the real prize would be a distribution deal with Tesco or Sainsbury's, which dominate supermarket sales, or one of the big high street wine store chains, since you can't try wines you can't buy.

One reason this is a good time to try to break into the UK and European markets is that the exchange rates favor U.S. exports. The dollar fell dramatically in 2007 against both the Pound and the Euro, making U.S. wines relatively less expensive. This will help, but it will still be difficult to get British wine drinkers to think beyond Gallo and one end of the market and Napa Valley at the other.

It's tough to break into foreign wine markets. Ernie Hunter famously did the DIY way -- he brought his wines to London and entered them in the Sunday Times wine festival, where they won the people's choice award. Ernie was from New Zealand and his surprise victory paved the road for Marlborough Sauvignon Blanc's dramatic rise in the world of wine. Washington and Oregon are taking a direct and organized approach, with tastings and seminars. Every case is different. My next post will tell an unlikely story of how Washington wines first came to Sweden.

Globalization, Wine Value and the Two Buck Chuck Index

Has the globalization of the wine industry given us the best of wines, as many wine drinkers believe, or the worse of wines, as the film Mondovino suggests?

Two economists from the Whitehead School of Diplomacy at Seton Hall University address this question in the December 2007 issue of the Journal of Wine Economics (see full reference below). Their conclusion? Globalization has benefited American wine drinkers, who have a broader choice of quality wines at lower prices.

That's pretty much what my supermarket empiricism leads me to conclude, but can it be proven scientifically? Here's how the article's authors arrived at their results.

First you need to define what it is that American wine drinkers are buying. The authors decided to focus on the Wine Spectator annual Top 100 list of wines. This has the advantage of limiting the study to a reasonable number of widely available wines. The Top 100 list is chosen each year on the basis of price, wine rating, availability and "excitement." Many people use rankings like the WS 100 to guide their purchases, so I suspect that there really is some correlation between what is on the list and what is on store shelves and restaurant wine menus. The disadvantage of limiting the study to the Top 100 is of course that most of the wine sold in America -- the inexpensive Gallo, Yellow Tail and Two Buck Chuck wine -- does not make it to this or any other "top" list. If we want to know if globalization has improved choice at the middle and bottom of the market we will need more research.

The authors examined the WS 100 lists from 1988 - 2005 to determine (1) where the wines came from, (2) how much they cost and (3) their quality as measured by the WS ratings. They then calculated measures to determine changes in the geographical concentration of the wines (more or less choice in terms of countries of origin), the average quality rating and the relative value to consumers as measured by rating points per dollar.

What we learn from this is that the overall quality of the top wines has stayed relatively constant over the years, but the real price has fallen and the range of offerings has increased. It cost $4313 (in today's dollars) to purchase the entire WS100 in 1988, for example, but just $2622 to buy the Top 100 wines in 2005. The cost per "point" of ratings in 1988 was 46 cents, so a hypothetical average 90-point wine cost $41.40. The per point cost was 28 cents in 2005 and so a hypothetical average 90-point wine cost just $25.20.

The top wines came from just six countries in 1998 versus 11 countries in 2005, an indication of the globalization effect. A great majority of WS100 over the years have come from four core wine countries: Australia, France, Italy and the U.S., but the proportion of non-core wines has increased, too, from just 5 percent in 1988 to 24 percent in 2005.

The authors divide the wine world of this study into Old World (France, Italy), New World (Australia and the U.S.) and "New-New World" (New Zealand, South Africa, Argentina and so on). Globalization has brought American wine drinkers more and more excellent New World and now especially New-New World wines that provide the same quality at lower average prices, according to the study.

Research like this is interesting both for the questions that it answers and for the new questions that are raised. It would be interesting, for example, to find how important the four criteria for selection are -- price, rating, availability and "zing" -- and if the relative weight they are given has changed. As the wine market has expanded, for example, greater emphasis may have been put on price and availability, leading to a Top 100 that leans more toward (global) good value wines.

It would also be interesting to see if the editors respond in any way to external forces. A lot of people read and study the Top 100 list, so perhaps they use it as a way to build the wine market (and thereby indirectly build their potential subscriber base). A focus on value would be consistent with this goal. A Top 100 list that you can't find or can't afford doesn't build the wine market and won't sell many magazines. The fact that there are more New-New World wines might reflect rising quality and availability of these wines or it could indicated that the WS editors desire to add these wines to keep costs down, value up and the market growing. In other words, the WS100 might show more choice and continuing good value because that's what the WS editors want it to show. I suspect that the truth is that the market has evolved toward global good value and that WS has been part of that process, encouraging people to try New-New World wines by putting them on the Top 100 list.

Exchange rates could also play a role here. The dollar has fallen against most currencies (increasing the cost of imported wine), but the depreciation is not uniform. The Euro is much more expensive but the Argentine peso has not changed as much. If would be interesting to see to what extent the WS100's New-New World globalization has offset exchange rate driven increases in Old World wine costs.

Another interesting question relates to the idea of value in wine purchases. It does seem to me that people often find themselves buying WS points or Parker points more than the wine itself because they are unsure of their ability to judge quality. One local wine merchant had a sale of wines rated 90 points or more for $20 or less. The idea was that the wines must be good value because of the low cents per point ratio. But there is more to wine than rating scores, as anyone who has tasted high-scoring wines will tell you.

It might be interesting to try to put together a slightly more sophisticated wine value index using WS and other ratings. I don't think that cents per point is a good measure because it assumes a linear relationship between money and quality -- and we all know that is not the case. Very expensive wines frequently receive much lower ratings than their cheaper competitors. I understand that a $100 Chardonnay came in last at the tasting where Two Buck Chuck won the Gold Medal.

Even where price and quality are correlated, the relationship isn't necessarily linear. The average price difference between an 86 point wine and a 88 point wine may be pretty small, for example, but it might cost a great deal to go from 92 to 94 points if the demand for the very best wines is particularly strong as is often the case in winner-take-all markets.

The price-quality relationship, even using imperfect wine scores as a measure of quality, is certainly non-linear. No wonder wine buyers are so confused -- and depend so much on ratings and lists like the WS100.

Here is a simple alternative to cents per point as a measure of value. Let's adjust price and quality for a baseline wine: Two Buck Chuck. You could call it the TBC index. Suppose that you can purchase a 70-point (to just make up a number) TBC Chardonnay for $2 (or $3 here in Washington State). The question we want to answer is how much does it cost to improve on TBC? A wine that gives you a lot of additional value for only a little additional money is a good deal.

In other words, the TBC index would be a relative index of value calculated by asking would be how many points in excess of 70 (or whatever the quality of the baseline wine you choose) you can buy for the dollars you spend in excess of the baseline cost. Here's a numerical example. A 88 point wine for $20 would have a TBC rating of (88 - 70 points)/($20 - $2) = 18 point/$18 or a dollar a point. An 86 point wine for $10 would be a better value because (86 - 70)/(10-2) = 16 points /$8 = two points per dollar. It seems to me that this is a better (but still badly flawed) indicator of relative value. (Economics students have already realized that I am applying the principle of decision-making on the margin to this problem).

Perhaps I will find some students to work on the TBC index, perhaps using a different base wine for each varietal or wine type. I predict that their research would find that the "optimal" TBC point is being pretty close to the heart of the premium wine market -- right on the center shelf in the supermarket -- where so many wine brands compete for your wine dollars.

Wine ratings are very important in some parts of the wine market and very controversial, too, so I think I will see what I can learn about them. With this in mind I have subscribed to six different wine-rating publications: Wine Advocate (Robert Parker), Wine Spectator, Wine & Spirits, Wine Enthusiast, the British Decanter and Wine Press Northwest (for Washington/Oregon wine news and ratings). Watch this space for a comparative analysis of these influential publications.

References: Omer Gokcekus and Andrew Fargnoli, "Is Globalization Good for Wine Drinkers in the United States?" Journal of Wine Economics 2:2 (December 2007) pp. 187-195).

The China Wine Syndrome

I've never tasted Chinese wine, but that's going to change quite soon. I have two bottles, both hand-carried from China by my former student Brian West. One is a 1999 Cabernet Sauvignon from China's oldest winery, Changyu (founded in 1892). The other is a 2003 Tasya's Reserve Cabernet Franc from what many people say is China's best winery, Grace Vineyard (or Shanxi Grace Vineyard to differentiate it from a Japanese winery with the same name -- Shanxi is the region of China where Grace Vineyard is located).

I have heard a lot of stories about Chinese wine -- about how bad it is, how prestige-seeking Shanghai yuppies mix expensive first growth Bordeaux with Coca Cola and of vast vineyards in China that threaten to flood world markets with cheap wine (as Chinese exports have flooded some other markets already). The prospect of drinking Chinese wine for the first time gave me an incentive to see what I could find out about the Chinese wine industry and market. Here is a brief account of what I have learned.

Wine has a long history in China, reaching back more than 2000 years to the first wine imported from Ferghana in what is now Uzbekistan. It wasn't until the 19th century, however, that more than a trickle of wine was produced or consumed. Western missionaries brought grapes and wine to China along with their bibles (as they did in California, Argentina and Chile). The real roots of today's industry were planted in the late 1800s, however, when Changyu and other wineries were founded, mainly to produce wines for the foreign communities in the commercial centers.

The communist government expanded wine production after the 1949 revolution. Wine was promoted as a form of alcohol made from abundant fruit sources (grapes, both vitis and indigenous Asian varieties, and other fruits) in order to reduce use of precious food grains for alcohol production. Wine was meant to replace beer or grain spirits in the diet. Wine was typically made from a combination of grapes and other fruits. I understand that it is still sometimes necessary to specify grape wine in China, since generic wine may be made out of any number of fruits. It is probably not surprising that Chinese who were brought up on these mixed-fruit wines might today mix dry grape wine with fruit juice or Coke to get a more familiar flavor.

China's vineyards are indeed vast, totaling six percent of the world total. There are 453,000 hectares of vineyards in China, which is roughly equal to the U.S. (380,000 hectares) plus Germany (98,000 hectares) or just over the half the vineyard area of France, the world leader. But 80 percent of the grapes are grown as fruit for the table grape market. About 10 percent of the grapes are dried to make raisins. The remaining 10 percent are wine grapes. China's wine production is relatively small -- 730 million liters compared to 2,546 million liters for the U.S. and 898 million liters for Germany. China produces about as much wine as Moldova and Romania combined -- a lot of wine, but still just 2.6 percent of the global total.

Comparative wine production statistics for China are a bit problematic because (1) much of the wine produced is not pure grape wine but may be mixed fruit wine and (2) the rules on what can be labeled Chinese wine are quite lax. Grape wine needs to be only 50% grape and Chinese wine needs to be only 50% from Chinese-produced juice, according to one report I found. This means that a great deal of the bad wine that tourist report being served is not really grape wine and may be a blend of a little Chinese grape wine and a lot of imported bulk wine of undetermined origin. Rules get bent and outright fraud is not uncommon, I understand.

China has about 450 wine producers, which is approximately the number here in Washington State. The industry is highly concentrated with four wineries accounting for 60 percent of domestic production and sales. The big four are Great Wall, Dragon Seal, Changyu and Huadong. Foreign partnerships are common, giving Chinese winemakers access to international technology and expertise. The French multinational Pernod Ricard helped create Dragon Seal in 1987, for example, and Seagrams and Remy Martin have also been involved in joint ventures.

If the quality of the large scale wineries is disappointing, as many tourists report, the reason can be found in the supply chain. Wine is only as good as the grapes that go into it, or so growers tell me, and the grape supply situation in China is difficult. Most of the wine grapes are grown by families that lease about an acre of land from their local agricultural commune. That acre is tyically divided into four or five small plots that are planted with different crops so as to minimize risk. One or perhaps two of the plots may be wine grapes in the vineyard regions. So vineyard scale is impossibly small -- smaller even than in the south of France.

These small growers insist on calling the shots, which is natural since they are so dependent upon the success of their tiny farms. The wine producers have no control over what these hundreds of thousands of micro-vineyards produce, how they are cropped, and when the grapes are picked. Researchers suggest that the grapes are chosen and grown to maximize quantity not quality and that the grapes are picked as soon as possible to minimize risk of poor weather than could destroy the crop. So small crops of flavorful fully ripe grapes -- the winemaker's dream -- that's not going to happen in a typical Chinese vineyard. One study I found suggested that the grapes sell for as little as $80 a ton.

There is not much incentive for individual growers to sacrifice quantity for quality because their grapes are sold by weight to agents who lump together fruit from dozens or hundreds of individual growers. Good fruit would quickly get mixed with inferior fruit, so why pay more? The local agents often then resell the fruit to regional agents who sell again to the large winemakers. You can just imagine the condition of the fruit by the time it finally gets to the winemaking facility having passed through so many hands. This system is worse than the European cooperatives I have read about (and I didn't think anything could be worse than that).

Wine is sold in all sorts of ways. The Changyu website offers to let me buy wine by the barrel, which is perhaps what I would do if I owned a restaurant or a village drinks shop where I could decant the wine into bottles, jugs, or any other available container. Economists who study the Chinese wine market are increasingly focusing on supermarkets as a growing distribution vector. Partly I think this is because grocery store sales of wine are increasing, but also I think because these economists are interested in the potential for foreign wine imports. I don't think relatively expensive French or California wines have much chance of penetrating the traditional bulk distribution system where a lot of Chinese wine goes, so supermarkets are their best bet. Supermarkets may also eventually play an important role in educating Chinese consumers about wine in general and foreign wine in particular.

A small number of boutique winemakers have appeared, often financed by Hong Kong Chinese families and using international "flying winemaker" expertise. This is the basic story of my Grace Vineyard Cabernet Franc. Hong Kong businessman C.K. Chan invested USD 7 million to build a French-style Chateau. He hired Bordeaux winemaker Gerard Colin to supervise production full time. Output is now more than 40,000 cases. My bottle of reserve wine says that it is estate bottled from grapes grown on the estate and this may suggest why Grace Vineyard wines are often rated the best in China: control of the supply chain. If Grace controls the quality of the grapes then they can better control the quality of the wine. People say that Grace Vineyards is the best French wine made in China. I'm looking forward to trying it.

The bottom line is that the future of wine in China is difficult to predict. Surely wine consumption will grow as China gets richer and Chinese adopt more western consumption habits. Wine production will grow, too, and quality will rise as better technology is adopted. But it will be interesting to how quickly Chinese consumers accept dry western grape wines after their long experience with mixed fruit wines. And it will be interesting to see how quickly the quality of grapes can be raised.

It seems to me that the biggest barriers to quality wine are not in the stores or even in the habit of mixing red wine and Coke. The biggest problem remains the sorry state of rural Chinese agriculture -- a good reminder that wine is fundamentally a product of the soil.

Note: Special thanks to Brian West for bringing wine back from China where he was teaching with a University of Montana law school program. Thanks as well to Judy Leissner, who runs Grace Vineyard, for her assistance in locating Grace Vineyard products. Click here to view an interview with Judy about running a family wine business in China.

Special Note (added 1/13/2008). Click here to read an interview with Judy Leissner on the a blog called The Grape Wall of China, which is a good resource on the changing Chinese wine industry. Thanks to Jim Boyce (a.k.a. Beijing Boyce) for this link.