Elliott R. Morss'  Instablog

The Global Wine Industry - Where Is It Going?

by Elliott R. Morss

June 2012

Introduction

It is hard to project the future, but I enjoy trying. And I am not alone. George Taber has written a great book that presages what is coming and Mike Veseth has just completed a 3-article series on it as well. One thing I have learned: history tends to repeat itself. So it worth looking back before looking ahead.

Then - Circa 1970 - 1980

When I was growing up, we drank Mateus, Snapple, Lancers Sparkling Rosé or Chianti in straw bottles. On special occasions, we spent more for Bordeaux or Burgundies. Consequently, I can today tell the difference between Burgundies and Chardonnays from elsewhere. Do I like the French ones better? They are good; I grew up thinking they were the best. But there are others I enjoy, e.g. the full bodied McManis Chardonnay from California ($12).

Then & Now - Production

Total wine production has fallen since 1980. According to the FAO, wine production has fallen 31% between 1980 and 2010 to 26 million tonnes in 2010. Italy has cut its production by half while French production is down 35%.

Table 1. - Global Wine Production

Source: FAOSTAT

Then & Now - Imports

Since 1980, Germany has remained the largest wine importer although its share is sharply lower. The UK, second largest has increased its share, as has the US. France's share has fallen by more than half. And unlike any other country listed, the tonnage of France's imports has fallen.

Table 2. - Leading World Importers

Source: FAOSTAT

Then & Now - Exports

Since 1980, wine exports have almost doubled and there have been dramatic changes export shares. As Table 2 indicates, "Old World" wines dominated exports in 1980 - 87%. And while the "Old World" export share was still more than 60% in 2009, the US, along with the "New World" countries have increased their share from 2% in 1980 to 32% in 2010.

Table 3. - Leading Wine Exporters

Source: FAOSTAT

Now - Significance of Changes

The jump in the "New World" and US export share has been extremely important: now, in addition to still getting good wines from the "Old World", we are also now getting them from the US and the "New World". And "New World" prices are often much lower than the Bordeaux/burgundies we used to purchase from France. What has changed? Most wines are now good enough so price is not an accurate indicator of wine preferences. And Americans are getting smarter - fewer will pay high prices for a brand name.

Does this mean things are over for the "Old World" countries? There is indeed a sense that European wines, while good, are expensive. In actual fact, many European wines compete pricewise with "New World" wines. Table 4 provides data on wines priced $15 or lower that scored 89 or more by Wine Spectator tasters. And my experience is that a WS 89 rating denotes a good wine. 52% of the reds and 33% of the whites with scores of 89 or better were from Europe. That means there are plenty of good, reasonably priced European wines available.

Table 4. Wines Rated 89 or Higher

Costing $15 or Less (2005-11)

Source: Wine Spectator

Price/Taste Relationships

Goldstein et al analyzed data from 6,000 blind tastings - a lot of blind tastings! I quote from their findings: "Individuals who are unaware of the price do not derive more enjoyment from more expensive wine. …we find that the correlation between price and overall rating is small and negative, suggesting that individuals on average enjoy more expensive wines slightly less…."

Lecocq and Visser analyzed data from three data sets totaling 1387 observations on French Bordeaux's and Burgundies. They report similar findings: "When non-experts blind-taste cheap and expensive wines they typically tend to prefer the cheaper ones." From another study, Goldstein et al that both trained and untrained tasters favored wine they knew in advance was higher priced.

Overall, Lecocq and Visser conclude taste has very little to do with wine prices: "Our results indicate that characteristics that are directly revealed to the consumer upon inspection of the bottle and its label (ranking, vintage and appellation) explain the major part of price differences. Sensory variables do not appear to play an important role."

My Unscientific Samplings

Many of the scientific surveys on wine preferences and prices have been done on Bordeaux/Burgundies. Far more should be done on "Old World" vs. "New World". In the last 5 years, I have done about 20 informal samplings with about 10 people at each. To make comparisons meaningful, I limit the wines to be tasted to one of four categories: heavy reds, heavy whites, light reds, light whites. For example, I recently did one using heavy reds: 5 wines tasted, 4 bottles (Malbec, Shiraz, Cabernet Sauvignon, and Merlot at $11 or less), and one Malbec costing $40. 3 of the 8 participants preferred the $9 Malbec to all the others. My other tastings have yielded the same pattern: no preference for more expensive wines.

One other finding from my unscientific tests: Blends (wines with more than one primary grape, e.g., a Shiraz/Cab blend) usually do better, ceteris paribus, than wines with a single dominant grape. Good examples of successful blenders are the producers of Côtes du Rhône (usually a blend of Grenache, Syrah, and Mourvèdre).

The Market - Who Are the Buyers?

In light of what has been said, the wine market can be broken into five distinct categories. These categories currently reflect the US market but will spread globally through time.

1. Alcoholics - Only half as many people die annually from alcoholism (2.5 million) as from smoking. But the World Health Organization has concluded that drinking is far more costly over a lifetime. In Russia and other Eastern European countries, the average alcohol consumption per adult is equivalent to what is contained in a .75 liter bottle of wine - a bottle a day. And the wine market has its share of alcoholics. They will buy cheap wine in larger bottles.
2. Informed drinkers - As indicated above, wine drinkers are becoming better informed. They know what they like and they know it is available inexpensively.
3. House Gifts - Always a problem for uninformed buyers and recipients. The buyers, not knowing wines, will get talked into a $20 bottle. The recipients, not knowing wines, will be upset if they get something costing less than $20.
4. The Vanity Market - only French Bordeaux/Burgundies costing $25 and up.
5. Other - Unique preferences hard to categorize.

In sum, we have alcoholics, informed consumers looking for the best deal, people trying to impress and everyone else.

The Future

What changes can we expect in the next decade? The globalization of information is leading to changes affecting all industries. These changes include consolidation, specialization, and new production methods. How these changes are affecting the wine industry is described below.

Consolidation

In wine, as with other alcoholic beverages, there are large economies of scale to be realized in marketing and distribution. As a consequence, there has been tremendous consolidation.

Table 5 provides just a hint on the enormity of the consolidations underway. Constellation is the largest wine company in the world, with Wine Business Monthly estimating that it sold 102 million cases globally (E&J Gallo global sales are estimated at 80 million). Note the number of brands each company has.

Table 5. - Leading Wine Companies and Their Brands

Source: Wine Business Monthly

The world's five biggest alcohol companies by market cap are listed below:

1. Anheuser-Busch Inbev (BUD)
   Belgium; Market cap as of March 29: $81 billion
   Top Brands: Budweiser, the Busch and Michelob families,Natural Light,Ice.

1. Companhia de Bebidas das Américas (AMBEV) (ABV)
   Brazil: Market cap as of March 29: $57 billion.

1. Diageo plc (DEO)
   U.K.: Market cap as of March 29: $42 billion
   Top Brands: Jamaican lager Red Stripe, Ireland's Kilkenny red ales and Senator Keg in Africa. DEO wine is sold under a range of brands, including Blossom Hill, Sterling Vineyards, Beaulieu Vineyard, Navarro Correas, Acacia Vineyard, Rosenblum Cellars, Piat d'Or, Chalone Vineyard, and Santa Rita

1. Heineken (HINKY.PK)
   The Netherlands: Market cap as of March 29: $25 billion
   Top Brands: Heineken and Amstel

1. Pernod-Ricard (PDRDF.PK)
   France: Market cap as of March 29: $22 billion
   Top Brands: Absolut Vodka, Jacob's Creek, Havana Club, Martell.

While of these five, only Diageo and Pernod-Ricard are major players in the wine industry, the others could enter easily. The economies of scale are there for all alcoholic beverage marketers/distributors.

And speaking of distributors, the US market is mostly in control of a few big wholesaler/distributors. Mike Veseth described the situation in a recent piece:

"7000 brands worth $30 billion in retail sales have to squeeze through 550 distributors in 50 states on their way to 76 million wine consumers. They need to go from maker (first tier) to state-licensed distributor (second tier) to local retailer (third tier). There are only limited opportunities for producers to skip a step. I understand that Bronco Wines, for example, can sell its Charles Shaw brand directly to Trader Joe's in California because of a legal loophole there, but has to use an independent distributor in other states. That's why Two-Buck Chuck costs $1.99 in L.A. but $2.99 here in Washington State. That extra buck is the cost of the extra distribution layer."

This is a real tragedy for specialty wine makers. Living in Massachusetts, I cannot have their wines shipped to me directly.

Consolidation could be slowed if all states were forced to allow interstate shipments of wine. Article One, Section 8 of the US Constitution gives Congress the power to regulate interstate commerce. Congress normally strikes down any actions that limit the free flow of goods among states. But not in the case of wine. Too many lobbyists working to keep things as they are.

Specialization: Grape Farmer - Wine Maker - Wine Seller

For most agricultural crops, the farmers are at the bottom of the totem pole. Their product is purchased by various middlemen before reaching the final consumer. Grape farming is a little different in that the grapes have to be converted into wine. Often, the grape farmers make the wine and even sell it - an integrated operation. In the future, I see less of this happening. Increasingly, I see the French Négociants' system taking over with a global twist - wine makers from all over will be buying the grapes.

Innovation

New players are entering the game with innovative strategies: three cases in point - Bronco, Casella, and 90+.

As mentioned in the prior section, wine entrepreneurs are today thinking - why is grape farming any different than any other form of farming? Traditionally, grape farmers have been the vintners: they have grown grapes, made their wines and sold them. But why does this have to be? Why should a grape farmer know how to make good wine better than anyone else? So wine entrepreneurs are developing their own cadre of wine makers to scour the globe looking for grapes to make good wine.

This can perhaps best be seen in looking at what Fred Franzia of Bronco and John Casella of Yellowtail have done as described in George Taber s recent book. Both are true revolutionaries, but their approaches are very different. Franzia gained notoriety via his Two-Buck Chuck (Charles Shaw) wines sold through Trader Joe's. And Casella's Yellowtail grew so rapidly that some estimate it now constitutes 50% of US wine imports from Australia.

Their differences: Consider first grape growing. As indicated above, Franzia has 32,000 acres in wine growing. How does he use these grapes? Some he sells off as grapes/grape juice, some he makes into bulk wines (and sells off), and some he uses for his own wines. Here is a Franzia quote from Taber's book:

"People don't understand that we're both buyers and sellers…. We buy grapes, and we buy wine. But we also sell grapes, and sell wines. We try to sell for more than we pay. We buy at $4 and sell at $6. And we do the same thing every day." But with all his grape growing, Franzia says his wines only use 55-60% of his own grapes. He adds that his wines will never be 100% from his own grapes.

While Franzia is a grape farmer, Casella does very little grape growing. According to Taber, Casella grows only 5% of the grapes that go into his wines. The rest come from 650 different sources. He has 4 staffers that do nothing but buy grapes for him.

When it comes to making wine, Franzia and Casella are similar. They both have teams of wine makers. They know their success depends on them producing good wines. A famous example is a Charles Shaw Chardonnay selling for $1.99 in California that won the 2007 California State Fair blind tasting wine contest against 350 other contestants where the average price was $28.50.

Casella, realizing that US consumers were used to relatively sweet wines, had his winemakers develop sweeter wines for the US market. Critics say the Yellowtail wines are getting better. And Casella has developed a new "Reserve" line of wines that are aged in oak with suppliers from France and the US.

Neither of them has any problem selling their wines through supermarkets, drug stores, whatever. Charles Shaw is sold exclusively at Trader Joe's but his other 110+ brands can be found in any retail outlet with a wine license. And Yellowtail can also be found just about anywhere, including Costco.

What do these two revolutionaries tell us? No need to be a grape farmer - Casella is not. If you have good wine makers, they will find grapes to make good wines. Even though Franzia is a grape farmer, he (or more specifically his wine makers) buys grapes from others for his wines. These revolutionaries are not alone. According to Wine Business Monthly, Castle Rock ranked as the 25th largest wine seller in the US, "owns no vineyard and no winery."

And then we have 90+ Cellars. According to its web site and a recent article in the Boston Globe by Jenn Abelson (March 27, 2011), it buys excess wines with that garnered 90+ ratings from wineries that produce them. 90+ finds top-notch wine that other producers can't sell, negotiates a bargain price, slaps its 90+Cellars label on the bottles, and offers them to customers at a steep discount. 90+Cellars, is one of a growing number of businesses taking advantage of the wine glut that resulted from the economic downturn. In less than two years, 90+Cellars, based in Boston, has generated nearly $5 million in revenue. What will happen when the wine glut ends? We will see.

Conclusions

In the above, I have sketched out certain trends that I see continuing. An increasingly sophisticated wine consumer will look for good wine at reasonable prices. Consolidation will continue that brings lower prices along with a certain homogenization. If only marketing and distribution barriers could be reduced…. But innovation will continue, and that should keep things interesting.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Latin America - The Dangerous Addictions

by Elliott R. Morss, Ph.D.

Introduction

A couple of years back, I asked what do humans spend the most on for entertainment. The answer is drinking, sex, and illegal drugs. More recently, I tried to determine the most dangerous human addictions. For this, I used DALYs (the Disability-Adjusted Life Years), a statistic recently developed by the World Health Organization. It measures years lost both because of a premature mortality and years lost due to time lived in less than full health. From the analysis of DALYs, I concluded that Alcohol, Tobacco, Overeating (Overweight, Obesity), and Illegal Drugs are the most dangerous addictions.

Table 1 provides the per capita DALYs for selected regions. The DALYs for the Commonwealth of Independent States (CIS) are amazing. This region has much higher rates on all four dangerous addictions than any other region in the world. Countries in the CIS are: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.

Table 1. Dangerous Addictions - Per Capita DALYs, 2004

Source: WHO

While the problems in Latin America are not as serious as in the CIS, DALYs are higher there than the world average on all but tobacco use. In what follows, addictions in the leading Latam countries are examined.

Drinking

Table 2 provides data on alcohol consumption for the age group 15-59 in leading Latin American countries. (In this and the following tables, the United States is included for reference). Argentina has the highest per capita ranking, but this is largely due to the fact that a greater percentage of the adult population consumes alcoholic beverages (83%) than in the other countries.

Table 2. - Annual Per Capita

Alcohol Consumption (in liters)

Source: WHO

However, when we look only at drinkers, we get a very different picture. As Table 3 indicates, more alcohol is consumed per drinker in Ecuador than in any other country. Ecuador is notable in that it is the only Latam country where women who drink appear to consume more alcohol than men.

Table 3. - Liters of Alcohol

Consumed per Drinker (annual)

Source: WHO

What do these figures mean in terms of daily consumption? 30 liters of alcohol consumed annually is the equivalent of daily consumption of 5.4 cans (12 oz.) of beer or almost a bottle (.75 liter) of wine, or more than 5 shots (44 ml/shot) of spirits.

Table 4 gives the breakdown on the types of beverages consumed in Latam countries. Wine is only preferred in the two leading wine producing countries - Argentina and Chile. Beer is the preferred beverage in all the other countries except Peru where the locals favor their Pisco brandy.

Table 4. - Beverage Preferences, 2005

Source: WHO

Smoking

Nicotine is an addictive killer. Nearly half of all heavy smokers die from smoking. Data on Latam countries are presented in Table 5. While the overall average is higher in Chile than elsewhere, more than 50% of men in Argentina, Peru, and Mexico smoke. In all cases, men smoke more than women.

Table 5. - Smoking Prevalence, Adults

Source: WHO

Overeating

Overeating has become a serious addiction worldwide. Elsewhere, I have suggested that this addiction might be the most important dangerous addiction. The UN reports that even in developing countries, there are more obese children than malnourished children. Data on overweight and obese adults in Latam countries are presented in Table 6. Mexico, Chile, Venezuela, and Argentina have the most serious problems. It is notable that obesity among women is higher than among men in all countries. And clearly, when it comes to obesity, the US is in a class by itself.

Table 6. - Overweight/Obese Adults, Prevalence

Source: WHO

Illicit Drugs

The prevalence of use and health problems resulting from illicit drugs is far less than the other addictions. Nevertheless, they remain a threat inasmuch as they are source of income for large and dangerous criminal organizations. Table 7 provides data on the prevalence of drug use for both adults and young people. Not surprisingly, cocaine use is far heavier than opiates inasmuch as most of the world's supply of cocaine is produced in Latin America. Argentina and Chile appear to have the most serious drug problems in the area. Most troubling is evidence that youths are using more than adults, a bad augur for the future.

The life style for youths in Latin America is conducive to the use of banned substances. For example, in Argentina, it is common for young people to attend night clubs that open at 1AM and close at 7AM. I quote from a friend who lives in Buenos Aires:

"In a country where people go out to dinner at 11 PM, going dancing after dinner means getting to a club at 1 AM and dancing all night. That schedule is absolutely the norm and has been for decades in BA. The most popular clubs mix live bands, extravagant shows and famous DJs who are stars in their own right playing pulsating, mesmerizing dance music, as part of the entertainment to draw big crowds."

Not to be prudish, but this is clearly a setting where drinking, smoking and drugs can flourish.

Table 7. - Drug Prevalence, Adult and Youth

Source: United Nations

Summing Up

Each of the dangerous addictions discussed above is serious enough to be considered alone. However, to summarize the importance of the dangerous addictions taken together for Latam countries, I have ranked the countries on all four addictions where a 1 denotes the worst country and 8 denotes the best. The rankings were based on:

• Drinking - Alcohol Consumed per Drinker
• Smoking - Overall Prevalence
• Overweight - Obese Total
• Drugs - Cocaine - Adult

The results are presented in Table 8. Chile and Argentina tied for having the most serious addiction problems, with both high on smoking and drugs. Mexico was high on drinking and overeating while drinkers in Ecuador consumed the most alcohol.

Table 8. - Dangerous Addiction Rankings, by Country

Of course, a lot of valuable data is given up when you use rankings. And the underlying data can be questioned. However, having been working with this data for some time, I believe Table 8 gives a pretty accurate summary picture of dangerous addictions in Latin America.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Dangerous Addictions: What Are They?

Where Are They Worst?

by Elliott R. Morss, Ph.D.

Introduction

Several years back, I documented that drinking, drugs, and sex were the leading entertainment sectors globally. Not surprising - human nature. Everything in moderation is fine - we all dig our own graves, etc. But what happens when "entertainment" becomes addictive? Which are the most dangerous addictions? And what regions are most seriously addicted?

The Most Dangerous Addictions

We often hear that 5+ million die of smoking every year. And most certainly, nicotine is a nasty, addictive drug. However, I have always felt that even though only half as many people die from alcoholism than smoking, alcoholism is more destructive. Why? Because drunks lose jobs, kill people while driving, and destroy family/friend relationships. As I just reported, this is borne out by the World Health Organization (WHO).

The WHO has developed a health risk statistic (the Disability-Adjusted Life Years [DALYs]). It measures years lost both because of a premature mortality and years lost due to time lived in less than full health. The DALYs for dangerous addictions are presented in Table 1.

Table 1. - Dangerous Addictions'

Share of Total DALYs, 2004

Source: WHO

Alcohol has the largest DALYs' share even though DALYs do not include harm done to families and friends. There are two other items worth remarking on in Table 1:

• The inclusion of overeating as a dangerous addiction;
• The small DALY share for illicit drugs.

Overeating = Overweight/Obese

The DALYs included in Table 1 for overeating come from the WHO's "Overweight and Obese" risk category. Overeating leads to being overweight/obese. That makes it a dangerous addiction. The United Nations reports that even in developing countries, the number of obese children now exceeds the number malnourished. And the DALY number could be much higher. Table 2 shows what share of breast cancers, cerebrovascular diseases, colon and rectum cancers, corpus uteri cancers, diabetes mellitus, hypertensive heart disease, ischaemic heart disease, and osteoarthritis the WHO attributed to being overweight or obese (5%). But look at the other headings in Table 2: high blood pressure, high cholesterol, high blood glucose, low fruit and vegetable intake, and physical inactivity. Ask any doctor, and s/he will affirm that all of these are all directly linked to being overweight/obese. As Table 2 indicates, if all of the DALYs listed are included under the overweight/obesity DALY Share, it would be 27%, far more than any other dangerous addiction.

Table 2. - Other DALYs Associated with Being Overweight/Obese

* Indicates illness associated with overweight/obesity

Source: WHO

For the reasons stated above, I believe the 5% figure is low. I believe overeating is the most dangerous global addiction. However, I use the data underlying the 5% share for the remainder of this article.

Illicit Drugs

The second notable point about Table 1 is how small the illicit drug share is use is relative to the other dangerous addictions - only 2%. And yet, illicit drugs are the only "illegal" dangerous addiction. What has making them illegal accomplished?

• The number of drug users is increasing worldwide;
• 25% of the people in US jails are non-violent drug offenders, and
• The US spends billions annually on unsuccessful drug eradication programs.

One might argue that the DALYs resulting from the use illicit drugs would increase if they were legalized. I agree. But history tells us banning/prohibiting a product for which there is a market never works. It only creates a lucrative new profit center for criminals. The best thing we can do with illicit drugs is what we now do with cigarettes - legalize them, tax them, and use some of the tax revenues for education and rehab services.

Which Region Has the Most Serious Addictions?

Table 3 provides data on per capita DALY's of dangerous addictions per region. The findings are quite shocking The Commonwealth of Independent States (CIS) has much higher rates on all four dangerous addictions than any other region in the world. Countries in the CIS are: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.

Table 3. - Per Capita DALYs by Region, 2004

Source: WHO

In the following sections, I examine CIS country data on these addictions using the US and Japan as reference points.

Alcohol

Table 4 provides data on alcohol consumption for the CIS countries, Japan, and the US. As can be seen, there are significant differences in both the percent of the population that drinks and the amount consumed by drinkers. Men in all countries consume more than women. In my recent article on drinking, I pointed out that 40 liters annually is equivalent to daily consumption of 6.2 cans of beer (12 oz. can) or 1.1 bottles of wine (.75 liter) or 6.8 shots (40 ml per shot) of whiskey.

Table 4. - Annual Alcohol Consumption, Selected Countries

Source: WHO

Alcohol consumption in Japan and the US is much lower than in the CIS.

Smoking

Table 5 presents data the percent of adults that smoke. Men smoke much more than women. The Russian average is higher than any other CIS country. 70% of men in Russia smoke. I have included Greece in this table because it has the highest average rate of smoking in the world. It is higher than Russia because a larger portion of women smoke in Greece than in Russia. The smoking rate in Japan is high while the US rate is lower and declining.

Table 5. - Adult Smoking Prevalence

Source: WHO

Overeating

Data on the results of overeating are presented in Table 6. And while the CIS as a region has the highest overeating DALYs, the US as a country is off the charts on this dangerous addiction. There are only a few small South Pacific Islands and two oil-rich Middle Eastern States (Kuwait and Qatar) that have higher obesity rates than the US.

Table 6. - Overweight and Obesity Rates

Source: International Association for the Study of Obesity, WHO

Illicit Drugs

Data on illicit drugs are presented in Table 6. Here too, it is clear that while the CIS as a region has the highest DALYs for these drugs, the US as a nation is a major market for these products. As mentioned earlier it is notable how low the use rates are on these drugs relative to the other dangerous addictions.

Table 7. - Illicit Drugs, Prevalence of Adult Use (%)

Source: UNODC

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.