What Is Keeping the Wine Industry So Prosperous?
Elliott R. Morss ©All Rights Reserved
Times are good in the wine industry. Consumption is growing and French vineyards are selling for millions as are vineyards in Napa. Below, I discuss the reasons things are so good and the few dark clouds on the horizon. In sum, things are good because of vineyard promotions, consumer ignorance and vanity, wine ratings, and good salesmanship. Clouds on the horizon include growing consumer awareness and the "blenders."
Vineyards, Varietals, Blends and Bulk
We all know just how valuable French vineyards are. Just think: the owners of the Bordeaux vineyards are getting Chinese customers to pay more than $5,000 per bottle! Spectacular marketing! And the Napa vineyard owners are also doing a great job in separating themselves from all the rest. Table 1 shows prices of Californian Cabernet Sauvignon by district. Napa is getting $6,846 per ton or more than twice as much as any other district. That is also great marketing!
Table 1. - California: Cabernet Sauvignon Price/District ($ per ton)
Source: USDA Grape Crush Report
What makes the marketing efforts of these vineyards so amazing? The realities of growing crops: all vineyards are going to have good and bad years. And it is utter nonsense to think the bad years in Bordeaux and Napa are going to be better than the good years elsewhere! Nevertheless, the great marketers stay on top year in and year out even though there are others producing "better" wines.
Some consumers like to choose wines by the grape/varietal rather than vineyard. Table 2 provides the leading red varietals measured both by acres and number of wine tastings by Wine Spectator (WS) during 2016. These tastings are a rough index of the relative popularity of the different varieties. Pinot Noir is notable. Relatively little is being produced, but at least WS thinks it is popular enough to warrant many tastings. At least some of its popularity stems from the movie "Sideways."
Table 2. - Leading Red Varietals
Sources: Wine Spectator and Anderson, K. and N. Aryal, Database of Regional, National and Global Winegrape Bearing Areas by Variety, 2000 and 2010, Wine Economics Research Centre, University of Adelaide, December 2013 (revised July 2014).
Table 3 provides the same data for white varietals. It appears that significantly more red wine is under cultivation than white. And for whites, the amount of wine grapes being grown conforms quite closely to the number of wines rated.
Table 3. - Leading White Varietals
Sources: Wine Spectator and K. Anderson and N. Aryal, op. cit.
Can most people tell the difference between the varietals? Consider first the most basic distinction - color. In a recent blind tasting, 3 out of 8 tasters could distinguish between red and white varietals. This is most definitely not impressive. Since we are talking about only two colors, a taster has a 50% chance of guessing the color correctly. I had a chance to talk with the tasters ex-post, and they were amazed at how unsure of they were of their judgments.
These findings lead to the question of whether people can tell the difference between varietals of the same color. My sense is that they can tell the difference between heavy and light wines of the same color but between the wines in the weight category. That is, people can tell the difference between a Chardonnay and a Sauvignon Blanc and a Merlot and a Pinot Noir. But people have real difficulty distinguishing between "lights" or "heavies" of the same color. That is, few can tell the difference between a Merlot and a Shiraz or a Sauvignon Blanc and Pinot Gris.
c. The Blends
Blends are of course not new: Bordeaux are blends, usually including the varietals Cabernet Sauvignon, Cabernet Franc, Merlot, Petit Verdot, and Malbec. However, a new form of blending is occurring and growing rapidly. Nielsen reports: "…red blends account for more than 13% of the $13 billion that consumers spent on table wine during the 52 weeks ended Sept. 12, 2015. That equates to about $1.7 billion, up from $1.15 billion for the same period in 2011, at which point red blends accounted for just under 11% of table wines."
In earlier pieces, I have documented how the wine industry is changing. It used to be that nearly all vintners grew their own grapes. No longer. Wine makers are increasingly buying "grape juices" from other and blending them to make their own wines. John Casella, the CEO of Yellowtail, is the "poster boy" for this movement. He grows only 5% of the grapes that go into his wines. In one recent year, he bought grapes from 650 different sources. Instead of employing farmers, he has a number of staffers that do nothing but buy grape juice for him.
Another example of what is happening: Castle Rock, ranked as the 25th largest wine seller in the US, owns no vineyards. The business is run from a small suite of offices in the Malaga Cove Plaza. I quote co-owner Greg Popovich from a recent interview: "We have our own winemaker, Joe Briggs, who is based in Northern California. We make wine in Oregon, Washington, at the Coppola facility on the Central Coast, and in Napa. Our winemaker oversees that whole process, and he has made every case of Castle Rock wine going back to 1994."
Tony Correia is a Californian property appraiser with wine vineyards a specialty. He bemoans the growth of Empty Brands:
"Walk into any Trader Joe's or a local grocery market and you will undoubtedly see offerings of the now ubiquitous Meiomi. This phenomenon reflects the pursuit of what I like to call "Empty Brands," i.e., brands with no vineyards purchased by major wine companies, which the companies plan to "fill up" to ramp up sales volumes and, theoretically, their profits. The most obvious examples would be Meiomi, Orin Swift , The Prisoner , etc., often described as "asset-light business models." With no vineyards attached to these brands, how do these companies expect to scale up production? The answer should be obvious: by shifting existing fruit supplies from lower priced products. Some of this fruit will now likely find its way into the newer, and higher-priced, "Empty Brands." Some Sonoma County Cabernet may now find its way into some "Napa" products while some Central Coast, or even Lodi, fruit may now be blended into products traditionally viewed as Napa or Sonoma."
The "Blenders" buy bulk wine to make their product. And not surprisingly, there is a lot of bulk wine available and the supply is growing. Table 4 shows that global trade in bulk has increased 63% since 2007.
Table 4. - Bulk Wine Traded Internationally (mil. US$)
Source: UN Comtrade
I again quote from Tony Correia:
"Enter, stage right, the newest concept in this business, "Fungibility." This concept is defined as the property of essences or goods that are "capable of being substituted in place of one another." In essence, fruit from a lower-valued appellation (Lodi) may be substituted for a portion of fruit in a higher-priced product as producers expand their search for margin, especially with the wine du jour, Red Blends."
Speaking of bulk wine, it is notable that in 2016, 84% of France's wine imports were bulk. Is there any chance that some of this bulk found its way into the wines produced at its hallowed vineyards? I think so.
Consumer Ignorance and Vanity
Of course, ignorant wine buyers and vanity help to keep the wine industry prosperous. In blind tastings, consumers are just as likely to prefer inexpensive wines to expensive ones. 1
But they continue to buy the expensive ones! As is the case with men's watches and women's perfumes, vanity is at play here as well. Some of my non-wine industry friends have little or no knowledge of wine. But they want to be known as wine connoisseurs, so what do they do? Like the Chinese, they buy only expensive wines.
There is another way vanity and ignorance keep wine prices high. When invited out for dinner, people often buy a bottle of wine to bring as a house gift. Excellent wines are available for less than $10 but few will buy them. Why? Either because of buyer ignorance or fear that the recipient would not appreciate getting such a low-priced bottle.
Ratings also play a key role in keeping high-priced wines selling. Do their ratings reflect people's tastes? There is no question that the tasters hired by the rating companies such as WS and Robert Parker can distinguish between wines within a single genre (grape or vineyard). But their rating standards reflect how closely a wine conforms to the genre, i.e., how well does Bordeaux X conform to the Bordeaux standard as perceived by their tasters. The key point here: conformity to a particular genre standard is not necessarily related to what consumers like.
In a recent series of tastings by the Lenox Wine Club, little or no correlation found between what wines people liked and ratings.
- Tasting 1: The highest rated wine was a Joseph Drouhin, Clos des Mouches. It had just been rated the best white wine at the Judgment of Princeton. In addition, it received a 92 rating from WS and a 93 rating from Robert Parker (NASDAQ:RP). Our tasters rated it next to last.
- Tasting 2: A Neyers Cabernet was the highest rated wine. WS gave it 92. Our tasters rated it dead last.
- Tasting 3: The highest rated was a Remoissenet. RP gave it a 90 rating. Our tasters rated again rated it dead last.
- Tasting 4: A Bordeaux Chateau Dominique was highest rated at 93 by both WS and RP. Our tasters rated it next to last.
- Tasting 5: The highest rated wine was a Greywacke. It got a 92 from WS. It came in dead last.
- Tasting 6: An Alta was rated highest: 94 by WS and 92 by RP. It received a middle of pack score by our tasters.
In short, the wines scored highest by the raters were not liked by Club tasters.
Conclusions - The New Realities
Above, the discussion has been of classic vineyards, varietals, blends, bulks and wine tastings. Consider next today's realities. Table 5 provides data on the largest selling US brands. With the exception of Kendall-Jackson and Ruffino, these brands do not have vineyards but buy bulk from others to make their wines. Most of these wines are reasonably priced. Both Black Box and Bota Box sell most of their wine in three-liter "boxes" that sell for the equivalent of about $4.25 per 750ML bottle equivalent. The fact that these wines sell so well suggests people like them. And just possibly, their growth indicates that there is a significant segment of US wine drinkers who are neither ignorant nor vain.
Table 5. - US Wines Selling More Than One Million Cases, 2016
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.