The New Wine Wars

We are celebrating  the tenth anniversary of the publication on my book Wine Wars here at Wine Economist world headquarters and I want to use this opportunity to reflect on how the wine world has changed since 2011. As I explained in last week’s column, Wine Wars is organized around a trio of strong forces that together (along with other factors, of course) shape the wine sector and many other industries, t00.  In very simple terms …

Globalization drives change. Commodification is a commercial response to these disruptive forces. Together globalization and commodification provoke grass-roots reactions that I call “the revenge of the terroirists.”  I think the framework still applies. But things have indeed changed. Here are some notes.

Wine and Globalization

Globalization continues to be a driving force in the world wine sector. Indeed, I think it is safe to say that more different wines from more different places are now available to more different consumers than at any point in history. World wine is truly an embarrassment of riches! Wherever we have travelled in the world of wine we’ve met producers anxiously seeking new opportunities.

But while the globalization pulse remains strong, there have been important qualitative and quantitative shifts. The first is that the fundamental nature of the market has changed from positive-sum to something much closer to zero-sum. As I was writing Wine Wars the world wine market had just come to the end of an era of expanding global wine consumption. I am not sure any of us where really aware of this sea change at the time. It was easy to blame the down-tick in consumption on the global financial crisis. But the recovery up-tick didn’t follow.

As this OIV graph shows, in place of rising year-on-year global wine consumption, we  entered what I have called global wine’s lost decade. (The most recent OIV data, which will be released later today, show dramatic further consumption decline in 2019 and 2020.) Global wine consumption reached a high plateau and flat-lined. Demand bumped up and down a bit from year to year, but that rising trend line that was so powerful before had vanished.

This doesn’t mean that wine demand was flat everywhere, of course. Among the major markets, structural demand declines in the old world — Spain, France, and Italy — was offset by rising demand in some new world markets, especially China (from a low base) and the United States (slow growth, but still growth).  I profiled what were then the three most important wine markets in Wine Wars: the UK, Germany, and the United States. Today you would need to add China to that list. In Wine Wars I speculated about what the rise of China might mean and some readers wondered why I even asked the question. There are still plenty of questions about China and wine, especially since recently sharp declines in both production and consumption in China ,but no one seriously doubts its importance any more.

Caught in the Crossfire

Global wine has changed in another important respect. Globalization in pre-Wine Wars was all about expanding international trade. Free trade agreements were the order of the day and the more of them that a country could negotiate the better. Chile was a big winner in this competition and its wine industry benefited enormously from easy access to the most important markets.

Now wine is caught in the crossfire of tariffs and trade barriers. The U.S. has imposed tariffs on some European wines, for example, and China has raised  trade restrictions on wine from both the U.S. and Australia. U.S. wine sales in China were relatively small, so the economic loss was limited, but China was Australia’s #1 export market and the pain is hard to over-state. In the meantime, the British withdrawal from the European Union — a.k.a. “Brexit is Brexit” — has thrown sand in the wheels of what was once a very efficient set of trading arrangements.

What is interesting about the new political economy of wine tariffs and trade is that it isn’t really about wine at all. Wine is simply caught in the cross-fire in other disputes. Why pick on poor innocent wine? Probably because wine has a clear identity and national association. Sanctions on wine from a particular place send a clear message. And of course with so many wines available from other places, the harm to consumers who are willing to accept substitute products is pretty limited.

Globalization is built on many complex structures including especially global communications networks, so it is easy to forget about supply chains and logistics until they break down — and that’s the most recent challenge that wine and other global goods confront. Global supply chains have recently shown themselves to be less reliable and most costly than many supposed when plans were made just a few years ago. The benefits of global reach must always be weighed against the security of local linkages. How much this trade-off has changed and to what extent it will impact the global wine sector is still to be determined.

Wine and Commodification

Commodity wine is only one side of the industry, but it has been an area of growth in the decade since Wine Wars first appeared. One way to appreciate this is to look at wine branding trends. There are many different types of brands, of course. Champagne is a brand, for example, and the producers are diligent in protecting their brand’s intellectual property. More broadly, there are collective brands (appellations, AVAs, etc.) and private brands (Mouton Cadet, Barefoot, etc.). Brands are successful when they encourage demand by providing an indicator of consistent value and quality.

As the market has become more congested, brands have become more important and evolved in interesting ways. One of the most important trends, which Wine Wars anticipated, is the rise of private label wines (which some call “exclusive label” wines in a nice bit of marketing). The maker’s brand is generally replaced or supplanted by the seller’s brand.  British supermarkets like Tesco made private label wine an important category and now it is everywhere. Here in the U.S. Costco, Walmart, and Target have their own wine brands, for example. But the phenomenon isn’t limited to large-multiple sellers. The upscale supermarket down the street (which appeared prominently in Chapter 3 of Wine Wars) is part of a small local  chain (nothing like Kroger’s vast network), but it has its own private label Champagne.

As the wine market has stagnated over all in many regions, the demand for private label wine has grown. Buyers look for value, retailers see higher margins. Growers and producers get the business they need even if they don’t control branding.  Some of these wines are very high quality. Others, of course, are drawn from lots of generic bulk wine from sources that vary from year to year and lot to lot depending upon price among other factors.

Take It To the Limit

What happens if the trend towards generic wines is taken to its logical extreme? In Wine Wars I joked (sort of) that we’d be left with Bud Red and Bud White — a threat that is more potent today with wine-in-cans gaining popularity. But I could never have imagined that we’d be staring at the specter of hard seltzer!

Wine today competes for a share of the stagnant overall beverage alcohol market. That means the growth in total wine sales need to come from other alcohol categories. And the toughest competitor in this space — the one that has been eating market share for lunch — is hard seltzer, a.k.a. flavored alcoholic fizzy water. I may be wrong, but this seems to me to be the real least common denominator threat to the idea of wine that most readers of this page likely share. Yes, I know that we’ve always had products like wine coolers, which may have served as a first step on the wine ladder. But if hard seltzer is the first step, I’m not sure what the second step might be!

Ultimately Wine Wars counted on what I called “the revenge of the terroirists” to keep wine from jumping the branded goods shark. How has that worked out? Come back next week for my thoughts.

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