Forecasting…

I last made New Year’s resolutions in January 2009 in WVN issue 74.

The reason was simple: I had absolutely no discipline when it came to fulfilling any of my pie-in-the-sky ambitions. To make matters worse I felt obliged to report on my performance a year after making my resolutions and it was a major embarrassment to publicly display my flawed lack of focus and discipline.

I may not be alone in this underachieving corner of the world. In fact, I don’t see many writers in any sphere spending much time any more on resolutions.  The new normal is to open the New Year with a forecast of what is going to happen over the next 12 months.  Depending on the wisdom and reputation of the pundit these forecasts can either be absolute jokes with not a hope of ever happening, or they can be carefully considered, reliable projections.

Earlier this week I read with some interest the forecast for 2014 published by Jamie Goode, the English wine blogger I wrote about when he attended the International Cool Climate Chardonnay Celebration last July.

Jamie Goode and Norman Hardie at i4C 2013
Jamie Goode (left) and Norman Hardie at i4C 2013

I will summarize Jamie’s eight predictions for 2014 as follows:

  • The commoditization of wine will continue apace
  • Wine will continue to lose market share; craft beer is on the rise
  • It’s going to be a good year for the Balkans and the ancient wine countries
  • It’s going to be a bad year for many wine writers
  • Many will wish they’d paid more attention to their established markets
  • 2014 will be the year of the niche
  • The rise of neo-prohibition will threaten the wine industry in many countries
  • We’ll finally see some real innovation in the wine category.

Jamie is well-established as an independent thinker and it’s hard to imagine a more unusual set of predictions and some need comment.

First, I do agree that commoditization is a growing trend.

As one industry player explained to a WSET Diploma class last night “there are no bad wines anymore, there are simply some wines that are better than others”. This is a telling admission but it recognizes that for most consumers wine is a commodity that comes in red, white, rosé and sparkling formats.  The wine industry is not a brand-driven sector, on any meaningful level, so there is not widespread attachment to individual wines the way there is to laundry detergents or luxury cars.

This is a challenge for the industry and it is a path that is well established among younger wine lovers – these people don’t have the aspirations to assemble large cellars of collectible wines; their interest is to enjoy a glass or bottle with friends in a social setting.

In other markets the major supermarket chains are leading the commoditization trend with walls of wines bottled under their own labels and sold at a fraction of the price of domaine-bottled appellation wines. The principle at play here is when you seek fun you will always go for the lower priced bottle.

This trend seems to be at odds with the situation in Australia where wines at the commodity end of the spectrum are the wines that have fallen in sales.  The comment I would make here is Australia grew its business at a rate that was unsustainable and reached a point where supply outstripped demand to the point that the market became saturated with Aussie wines while at the same time countries such as Chile and Argentina came to the fore.  Australia found itself the victim of a perfect storm that was to a large degree of its own making.

In Ontario the LCBO seeks to increase sales of premium-priced wines and is making some progress in this regard but General List sales showed higher growth in both value and volume than Vintages in the most recent fiscal year. More telling is the fact that International Canadian blends displayed high growth at the LCBO in 2012-13:  Bag-in-box sales grew by 12% and bottle sales increased by over 16%.

Jamie is on to something with the commoditization forecast.

The wine writer forecast is not a new one and it is linked in direction with his comment about the year of the niche.  The major writers and journals such as Robert Parker, Wine Spectator and Decanter have all lost share of mind as the blogger phenomenon has taken flight.

Many bloggers are unreliable and have no following.  Other bloggers launch their flight with great energy and lose interest quickly, quietly disappearing in the digital ether.

Despite this pattern there are over 1400 active bloggers extant today (see http://winebloggersconference.org/from-the-organizers/complete-list-of-wine-blogs/ for a set of links to different blogger communities around the world).

The issue at the heart of Jamie’s forecast is the fragmentation of the influencer community and the need for writers to carve a niche for their message. The fragmentation mirrors the fragmentation of the wine industry itself, with no one player dominating production, distribution or promotion of the sector. In such traffic writers need to find a place where they can specialize, build their reputation and attract a following – all in way that acknowledges that few if any readers share the passion for wine possessed by the writer.

This fragmentation and specialization leaves open the door for local influencers to play a role that would not be possible in almost any other consumer market and with the result that the commoditization trend described above has such strong momentum.

On top of it all there is very little revenue in this fragmented influencer market…

The forecast about wishing they paid more attention to their established markets is a reference to the growing investments made in China by many large Old – and New World makers.

It is Jamie’s opinion that the Chinese market is “proving to be a tricky and uncertain market at the moment”.  I would agree with his view: it will be a long while before grape wine will be mainstream in Chinese culture. For the Chinese, wine is a high-alcohol spirit made with rice and other sugar sources.

The concept of enjoying a bottle of table wine with a meal is foreign to Chinese consumers and yet there have been enormous direct investments and joint-venture projects established in China by a number of firms who seek new opportunities to grow profits, profits that are under pressure due to things like commoditization.

Recent events have demonstrated the fickle and uncertain nature of the Chinese market for western firms.  Austerity measures imposed by the government in the past year were aimed at putting a stop to the gifting to government officials of expensive wines, spirits and other luxury goods by firms seeking to curry favour and pursue their mercantile interests with public decision makers.  The effect of this was to dramatically affect local sales of Cognacs and Champagnes to the degree that the major companies selling these products have reported notable earnings decreases in recent quarters.

Beware.

The last comment I will make is one of anticipation.  This concerns the innovation forecast, one that recognizes there are players who will seek to differentiate themselves and their products on the wine walls of the world – the shelves where wines are displayed in stores around the world.

The innovation Jamie expects will be that which allows a producer to distinguish their products from all the other look-alikes in similar tall bottles.

Goode makes no forecast of what form this innovation might take.  So, let’s watch and see what happens.  Will it be a new package, a new way of distributing wine, say by subscription, sold at a kiosk in the store?

Stand by.

à bientôt…

Copyright© W. John Switzer 2003 – 2014.

 

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Book Review – Wine Wars

Mike Veseth is a professor of international political economy at the University of Puget Sound in Tacoma Washington.  He has written, co-authored or edited many books on economic matters including Globaloney and Globaloney 2.0, books which deal with globalization and how economic policy must adapt if we are to solve the complex problems our policy makers face today.

Mike also happens to be a wine lover who hosts one of the most interesting wine blogs extant: The Wine Economist. He describes his blog as “what you get when you cross the Wine Spectator, America’s best-selling wine magazine, with the Economist, the world’s leading business weekly.” I think Mike’s metaphor mis-speaks:  his blog is much more readable and appealing than the dense, hectoring editorial tone of the Economist magazine. I commend this blog as one of the most thought-provoking wine blogs I follow.

Mike has applied his economist’s perspective, his understanding of global affairs, his clear understanding of the business of wine and his crystal clear writing style to assemble one of the best wine books of 2011, according to Paul O’Doherty, book reviewer on JancisRobinson.com.

The book is Wine Wars, published in 2011 by Rowman & Littlefield.

This book is a great read for a general interest wine lover but is a book that could also be used as a reference book for a university-level wine marketing course, be it a wine MBA program at UC Davis or an undergraduate seminar at the Cool-Climate Oenological and Viticulture Institute at Brock University. Veseth writes clearly and weaves his analysis carefully so that non-technical readers will understand his thesis and have no difficulty embracing his conclusions. At the same time the book ponders questions for makers, importers, marketers and retailers that are excellent fodder for debate and analysis by students who will need to address the market scenario he paints for the future.

There are two themes that run through the book:  the notion of the wine wall and, the work done in 2008 by four senior people at London wine merchant Berry Brothers and Rudd (BBR) in The Future of Wine Report.

The wine wall is the wall of shelves the consumer faces in their local wine store – be it a boutique, a supermarket, a Costco store (in the USA), a monopoly store, Trader Joe’s, an Aldi store in Germany, etc.

The wine wall of today is the best and most diverse demonstration of globalization of products and brands found anywhere in the world of consumer products.  The wine wall can be bewildering to most consumers and Veseth walks us through how retailers adapt their version of the wall for their markets and their strategies – all in the interest of selling the most wine possible.

One of the best sections of the book is the analysis of how Tesco (UK), Aldi (Germany and elsewhere in the world) and Costco in the USA have built different wine walls and how each maximizes its share in its chosen market segments.  Veseth selects the UK, Germany and the USA with specific intent: these are the top-three wine importing nations today and the firms he selected are the leading wine retailers in their markets.

The second theme was the trigger for this book.  In The Future of Wine Report, Jasper Morris MW, Simon Field MW, David Berry Green and Alun Griffiths celebrated the 310th birthday of BBR by looking forward to the world of wine in 2058.

These gentlemen project climate change will do wonders for Canada as a leading wine producer by 2058. Wine fraud will be brought under control by microchips embedded in wine bottle closures. Some wines will be made from genetically-modified grapes grown hydroponically on offshore floating island vineyards. Australia will become too hot to produce quality wines in volume and production of boutique wines will be limited to a small handful of currently marginal climate zones such as Tasmania. China will become the world-leading producer of wine (measured by volume). Iconic wines such as the Classified Growths of Bordeaux will be bid up to stratospheric price levels  by demand which will wildly out-strip supply (consider the BBR estimate of ₤10 million for a case made by an exceptional producer in an exceptional year…!). Climate change will see the sparkling wines of England reach quality levels where they challenge the best wines of Champagne; etc.

One forecasted item was the BBR expectation that branded wines will become so dominant that consumers will be able to order wine as they might order spirits today.  Instead of ordering a Sapphire martini, the consumer of 2058 will order a carefully manufactured Lindemans Light or a Rosemount Red – made from grapes assembled from different countries, with flavourings added to make the specific-tailored styles preferred by consumers.

This aspect of the evolution of wine and wine markets became a catalyst for Veseth’s analysis that articulates how consumers, retailers, critics, makers – large and small – will shape the wine market of the future…and by my estimate it won’t take until 2058 to shape that future.  This book deals with wine labels, wine geography, craft makers, huge wine conglomerates (think Constellation and Gallo), the importance of brand in de-risking wine purchases for fearful/timid consumers, market segmentation and on and on.

The book is replete with facts that astound.  For instance, the number 1 wine brand in the world is Franzia.  This is an American brand of The Wine Group, the third-largest wine company in the world.  Franzia is a brand noted for its wide range of bag-in-box wines such as Chillable Red and Refreshing White.  The boxes come in 3 – and 5 litre sizes and are sold at three different price points, depending on whether they are “refreshing and fruity”, reflect “old world heritage” or are “true to the varietal flavor without the overpowering flavor of oak” (quotes are taken directly from the Franzia web site).

Franzia, by the way is not connected with Fred Franzia, the owner of Bronco Wine Company. Fred is the nephew of Ernest Gallo, co-founder of the Gallo Brothers business and Bronco is maker of Charles Shaw wines, best-known as Two-Buck Chuck, wines that sell at Trader Joe’s stores in California for $1.99 per bottle. Fred is perhaps best known for his quote, “We choose to sell good quality wines at $2 a bottle because we think it’s a fair price. We think the other people are charging too much.”

All these players get recognition from Veseth in ways that demonstrate aptly how the world of wine is evolving to make wine more predictable for consumers who want to avoid lemons when they make their purchases – the McWine effect, Veseth calls this.

The world outlook is not as bad as it might sound.  Just as every consumer product market is segmented to cater to different appetites, attitudes and budgets, so too the wine market will continue to evolve and the wine wall will adapt to cater to different consumer segments.  Many consumers will suffer “arrested development” and never venture beyond the Two-Buck Chuck section of the wall. Other consumers will seek only the wines on the top-shelf of the wall – the icons that most of us don’t buy, due to budget or philosophical barriers.  In between the top and the bottle shelves of the wall will be where most of my readers will continue to seek wines that reflect their sense of place and Veseth sees a rosy future in this middle ground.  Read his book to understand his rationale…

The Veseth analysis is thorough, sound and matter-of-fact. This is a well and tightly-woven story, well-told by a creative thinker who appears also to be a good and caring teacher. A fascinating read, this book has pace, humour and insight.

Highly recommended!