by Elliott Morss, Morss Global Finance
Introduction
The world is replete with wine conferences, e.g., The American Association of Wine Economists, Wine Vision, and Vinexpo. And typically, these conferences have one or more sessions on the future of the wine industry. But there is one easy-to-predict “future” that is rarely mentioned: more fraud. The reasons for more of this – product segmentation and weather – are discussed below.
Product Segmentation
It used to be that most wine came from “grape farms” where the farmers who grew the grapes also made the wine. This is all changing – we now have “urban vintners” making a significant mark. Perhaps the best known of this group are John Casella of Yellowtail and Fred Franzia of “Two-Buck Chuck” notoriety from the Bronco Wine Company.[1] Both Casella and Franzia buy a lot of bulk wine from others.
Franzia and Casella are admittedly different: Franzia, with 32,000 acres in wine growing is part farmer. But only part farmer. He sells off some of his grapes/grape juice, and some he uses for his own wines. 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.”
Franzia uses only use 55-60% of his own grapes in his wines. He adds that his wines will never be 100% from his own grapes.
In contrast, Casella buys nearly all his wine in bulk. 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.”
How much “virtual winemaking” – making wine without growing grapes or owning a crushing facility – is there? Current data are hard to come by. But Wine Business Monthly reported that in 2006, there were 5,970 wineries in the U.S., with 1,587 of those buying all their grape juice/wine from others.
The Advantages of Buying Bulk Wine
For all farmers, there are good and bad years. It is the same for grape farmers: all wine regions have good and bad years. And not having to worry about weather and disease makes sense. Why not operate with the option to buy grape juice from farmers who are having good crop years?
Another reasons for not being a grape farmer: the costs of growing your own grapes. Beyond land costs, there are the winemaking supplies, equipment, vines, barrels and tanks used to store the wine, and staff costs. Marketwatch notes that these costs can amount to more than $30,000 per acre per year.
Of course, being a wine négociant (someone who only buys bulk and blends it) rather than a vigneron (someone who cultivates a vineyard for winemaking) is not new: French wine négociants have been active for many centuries. But they are different from the new breed: the French négociants primarily buy and blend within specific French regions.
The new entrepreneurs are buying and blending from worldwide sources. All this new group of wine entrepreneurs needs are bulk wines and some good “tasters” who know how to blend them so they will appeal to customers.
So how extensive are the operations of the new entrepreneurs? Getting in-country data is problematic. But bulk wine shipments between countries are available and suggestive.
International Bulk Wine Shipments
Table 1 provides data on the average of global bottled and bulk wine shipments for two periods (the averages are given because there are significant annual swings depending on crop abundance. Volume and price growth for both has been significant. The bulk shipment share has declined a bit but still exceeds more than 40%.
Table 1. – Bottled and Bulk Wine Shipments, 1990-94, 2010-14 (million liters)
Source: Comtrade
The largest country wine importers for both 2007 and 2014 are presented in Table 2, with breakdowns for bottled and bulk. Many of these countries import a lot of wine because of their limited ability to produce their own wine. But the countries highlighted are worth looking at more closely
Table 2. – Leading Wine Importers with Bulk Share, 2007, 2014 (million liters)
Source: Comtrade
The USA has a much larger import total relative to its own production than the other two countries. In all likelihood, some of these imports are used to substitute for wines exported via the US Department of Agriculture’s wine export subsidy program. In contrast to the US, most of France and Italy’s imports are bulk, 83% and 92% respectively. One does wonder how these bulk wines are used.
Table 4. – Bulk Import Share, 2014 (million liters)
Source: Comtrade
Both France and Italy got most of their bulk from Spain. Chile was the largest bulk supplier to the USA.
Okay, so far, no reason for increased fraud.
Region/Terroir is Important, at Least for Marketing Wine
There is general agreement that defining wines by grape type is not enough. The taste of wines made from the same grape will differ by the region where the grapes were grown. And this has led to tremendous differences in the prices that varietals can claim. The most extreme example of this are the prices that red wine blends made in the Bordeaux region of France can bring.
Quite clearly, certain wine-growing regions enjoy huge price differentials over others. And this has led to associations being created to promote regions/terroirs. One example: the “Wine Origins” association. Its members include by country: Australia: Victoria, Western Australia; France: Bordeaux, Bourgogne/Chablis, Champagne; Hungary; Tokaj; Italy: Chianti Classico; Portugal: Porto; Spain: Rioja, Jerez-Xérès-Sherry; United States: Long Island, Napa Valley, Oregon, Paso Robles, Santa Barbara County, Sonoma County, Walla Walla Valley, Washington State, Willamette Valley. Apparently, the winemakers in these regions believe associating their wines with their regions will add value.
So what happens in these regions in a bad crop year? Might some imported bulk be used to supplement the wine made from grapes in the region? It probably happens. And when it does, if the imported bulk exceeds an allowable share, it is fraud. How important is this fraud? We don’t know, and it is certainly something the wineries want to keep quiet.
But there is reason to believe fraud will increase dramatically soon. Read on.
Climate Change
A recent study from Conservation International makes this chilling forecast:
“[There will be]… sharp declines in wine production from Bordeaux and Rhone regions in France, Tuscany in Italy and Napa Valley in California and Chile by 2050, as a warming climate makes it harder to grow grapes in traditional wine country.
‘The fact is that climate change will lead to a huge shakeup in the geographic distribution of wine production,’ said Lee Hannah, a senior scientist at Conservation International and an author of the study.”
I quote further from the study:
“The evidence suggests that global warming will affect wine grape and wine production, not only in grapevine physiology and biochemistry, but in the production methods used to make wine. This implies that viticulture managers and producers need to consider a wide variety adaptation and mitigation methods to preserve their wines׳ quality, identity, and profitability.”
Keep in mind the huge investments that have been made in these regions. They have effectively become “game parks” for wine aficionados’. Quite clearly, the wineries in these regions do not want to lose their huge price edge. One way to maintain it as wine quality and quantity decline is to add bulk wines from outside the regions. This can be done in two ways: vineyards could fess up and simply announce they are adding wine from outside the regions. The other way would be to add imported bulk and keep it quiet. That would be fraud. I expect that at least for a while, many regions will opt for the second approach and commit fraud.
Conclusions
There is some fraud in the wine industry now. But for the reasons stated above, fraud will increase. The fraud, substituting bulk from outside the region and keeping it quiet, will probably grow as the grape growing conditions in the high value regions deteriorates
For most people, the fall-off in quality will not be noticed. That is because most taste tests conclude that individuals like low-priced wines just as much as high priced wines.[2] And with that in mind, I will continue drinking from 3-liter boxes. Costing a little over $4 per equivalent 750ML bottle, the box people make no claims for “their vineyards.” Instead, they buy and sell good bulk products.
But like watches and perfume, some will continue to chase the wines with “prestige.”
- More on these revolutionaries can be found in George M. Taber’s book “A Toast to Bargain Wines: How Innovators, Iconoclasts, and Winemaking Revolutionaries Are Changing the Way the World Drinks” Scribner, New York, 2011
- Robin Goldstein, Johan Almenberg, Anna Dreber, John W. Emerson, Alexis Herschkowitsch, and Jacob Katz, “Do More Expensive Wines Taste Better? Evidence from a Large Sample of Blind Tastings”, Journal of Wine Economics, vol. 3, no. 1; Sébastien Lecocq and Michael Visser, “What Determines Wine Prices: Objective vs. Sensory Characteristics”, Journal of Wine Economics, vol. 1, no. 1; Robert Ashton, “Wine as an Experience Good: Price Versus Enjoyment in Blind Tastings of Expensive and Inexpensive Wines”, Journal of Wine Economics, vol. 9, no. 2; Lenox Wine Club.