Beringer & The Morgan Stanley Report

Beringer Vineyards & Winery

I had some really intriguing calls the past 6 weeks that all come out of activity in Australia and Treasury Wine Estates in particular (TWE.EX). The calls centered on Beringer which has been rumored for sale for years. Those rumors have grown since the disclosure that Treasury Wine Estates had Beringer destroy $150MM in wine inventory in the US. Things got more intriguing last week with the release of the Morgan Stanley Report that predicted dire shortages of wine supply. All that traffic out of Australia ... so I started to wonder if the two events might be related?

Wine Sales In the Last Half of 2013

The Best View of the Housing Bubble Pre-Crash

I recall giving a speech in August of 2008 to about 125 growers and winery owners. The speech was on the economy and I pulled up the slide above to demonstrate what I was seeing ahead of us. This was at a time just after Lehman Brothers collapsed where it had become apparent that we had crested a market high in housing and entering a bearish period. What the chart says in brief, is the historical average ratio of existing home price divided by median 4 family income is 2.8 times. That's what the red line is. With a ratio of 2.8 times, if a family made $100,000 a year, they could afford a $280,000 home. You can see what happened by late 2006 into 2007.

What Does the End of QE Mean for Wine?

Everyone likes Fridays. This Friday is a little more special so I decided to post a non-Sunday blog for the first time. Why the deviation? Because Friday is the day we receive the most hours of sunlight in 24 hours .... and then its all downhill after that.

While that sounds a little gloomy phrased up that way, consider that its coming from someone who has been following and predicting the movements in the economy and wine business the past few years. Its been enough to make anyone gloomy especially since I've been consistently right. (Editors note: Please don't wake me and remind me of a forecast that was wrong. Thank you.)

Anyway, something happened yesterday that is making me put on economic sunglasses to protect my eyes: The Fed announced the economy is looking pretty darned good, inflation is in check, and unemployment is coming down to manageable levels. Add to that the US Credit Rating was raised back to AAA about 10 days ago and that is down right exciting right? What did the markets do? The Dow dropped 200+ points and the 10 year Treasury Bill rose 13 basis points. In fact the 10 year, which is the benchmark used for vineyard and acquisition financing has increased about 40 basis points since May. So what gives? If this is good news why is the market off and what does that mean for the wine business?

Why Sell Wine Based on Aroma and Taste?

Selling commodities is difficult because people buy on emotion, or instinct if you will. Want and desire are powerful emotions that can stimulate the release of endorphins. It's why some people are shop-a-holics. It feels good to buy. But it's not that easy to get emotionally worked up about borax, chlorine, and salt. As an economic good, a commodity has no real differentiation, so small price differences in competing products can make huge differences in total sales.

Think about how you won't buy gasoline at one gas station because it's four cents cheaper around the corner. That's a commodity. Ever buy a piece of art that way? Of course not because art's value is in the eye of the beholder, is easily differentiated, and consequently will have wide price ranges. When art is sold, it's sold on the artist's reputation or the emotion the piece evokes for someone. Marketers work overtime to take commodity-like goods and then pretend they aren't commodities by creating and building an emotional appeal around the brand.

The Dance of Grape Pricing

 



ABC. It's Easy As 1-2-3

 

The vines flowering this time of year remind me of seventh grade. Maybe its the Aqua-Net hairspray smell the flowers produce but that's when we had our first crack at dancing after school which made institutionally official, our life-long quest to read the minds of the opposite sex. Filing into the sour milk scented cafeteria one sweltering afternoon, the boys took up their station on one wall while the girls occupied the opposite wall. The girls giggled and pointed at us prepubescent pimply-faced males while we in turn stared blankly back across the barren dance floor. "ABC. It's easy as 1-2-3" from The Jackson 5 cranked at volume eleven in the background, so we started to move to the music right where we stood thus signaling in our Cro-Magnon genetic way that we could dance. Well, we could if we wanted to. We just didn't want to. The girls of course had been practicing their dance moves since 3rd grade in front of their full-length closet mirrors. Us boys? We were playing baseball, football, kick-the-can, capture the flag, and tiddlywinks, oblivious to girls - unless you count the observation of cooties.
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If you want to skip my meandering memories from 12 year olds first dance experience, you can skip down To The Point Now.
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What's the One Job Wineries Can't Fill?

Click To Enlarge

According to the SVB Wine Conditions Survey we ran in late 2012, direct sales in different forms represented three of the top five areas of opportunity this year. So why don't all wineries just go head-first into the gaping chasm of the direct sales opportunity and shed the bonds and shackles of the three-tier system?

Really the whole thing with direct is a love/hate relationship. Winery owners love the higher margins but they hate figuring out the labyrinth of change required to install a top functioning direct program. To be fair, its really not an easy path with hurdles in so many areas including hardware that isn't integrated and skills that aren't available or in many cases even well defined.

Is Your Wine Trash or Treasure?

You've heard the saying that one man's trash is another mans treasure. How is it possible that two people can view the same object completely different? Its the difference in how each man values the object in question and how the object makes them feel. What about your wine? Is it trash or treasure? It really depends on who is answering the question AND if they are a target consumer for your product. If they are your target - they better not answer trash. Value is a consistently misunderstood concept but it is critical to consider in any successful marketing strategy.

This is the time of year when the end of year news starts to wane  and winery neighbors come out of their cellars to see if they have a shadow then discuss microbial spoilage, stuck fermentations  and quite often these days - their strategy to market their wines and how to do it in the context of a changed economy. Take a look and listen at just such an exchange in the above movie.

Need Some Fresh Ideas To Help Your Marketing?

If you are like me, you get offers of reports on trends in the wine business about every day. Several years ago I saw a synopsis of an extensive report that seemed pretty interesting. For the mere price of $2,500US I had a several hundred page report on my desk in about a week. Now this was when I still had an expense account so please don't start emailing me more sucker offers.

Sadly, much of the report seemed like it was written by a fresh-out-of-college student, or at a minimum someone who never lived in the wine business. It was rehash of everything you already knew. To make matters worse, I was cited in several places for things I'd said. That instantly devalued the purchase. Why would I listen to me? I always lie.

What Does Harley-Davidson share with wine?

What are the key ingredients for success in business? In my mind its defining effective strategy, having a sense for timing in execution, cohesion in a business culture, focused effort, and a bit of luck. But in the end, there is really one thing that separates successful and unsuccessful businesses: Leadership.

There are several successful leadership styles but there is a character trait most successful leaders share. They have the ability to constantly critique their own success and failures and adapt early. They are people who challenge the status quo routinely, constantly seeking improvement rather than living by rules of thumb and falling into routines and ruts.

You are a smart enough person if you run a business or manage a unit within a company. But if you can't back away from day-to-day duties and get a grasp of the environment changing around you and then strategize for the long run, you might be in the wine business for the short run.

I was reminded of that when I saw [an article] this past week about AMF Bowling seeking bankruptcy protection for a second time within the same decade. I honestly hadn't tracked the company of late, but had in the past as a young banker.

I recall sitting at my office in the early 1980's, reading an analyst report on the company that was covered in the WSJ. In it, the analyst reasoned that with the personal computer taking flight, and given all the accompanying enhanced productivity gains we would see, soon we would all flock to leisure activities to fill up our newly discovered copious free time. As a result, we'd see companies like AMF and Voit take off.

Time For Post-Harvest & Post-Election Yogi.

When life is confusing, we all have to have a moral compass. For me, I look to the immortal Yogi Berra to make some sense out of things. Lets look at a few factoids:

• That was two years of campaigning estimated to have exceeded $6 billion dollars. That is with a B. . . . . six billion. I remember when a thousand million was meaningful and to cite the immortal Yogi Berra, "Pretty soon that adds up to real money."

• How expensive was it? It was the most costly election in world history according to the Financial Times by almost double. It cost $18 for every man woman and child living in the US. And what did that money get us? ...... just about what we had before. So the real question is, who is expecting a different result? It's deja-vu all over again.

• Don't you think it's strange that the approval rating of Congress is lower than that of amoebic slime mold  (....even lower than bankers....)  and we largely voted the same gridlocked bunch back into office? I guess that means we've lowered our expectations of our politicians. The future aint what it used to be.

• Your guy didn't win? Just buck up and stop your whining. Its a victory knowing we can get back to normal and reclaim our lives like they were before fact-checkers at different networks came to different conclusions about the same facts. They could have observed a lot by just watching.

• It says something about us that when our candidate loses a debate, the FOX or MSNBC talking heads start flogging the moderators and then read idiotic tweets and emails from "anonymous" just to look like they are with it from a social media perspective. Its like when your team loses, you got jobbed by the refs. When did respected news-people become fair game instead of the candidates? My advice is next time the spin room gets an anonymous letter, don't open it.

•  Ever notice how every year after harvest whoever is interviewed says, "This was one of the best growing years ever." Oh sure there was frost at budbreak. That just made the vines work harder. And yea ... there was a monsoon at flower, but that just lowered the yield naturally. We didn't need to drop fruit. ...... So when we really DO have the best harvest .... maybe ever, who is going to believe us? Maybe we need to plan our spokesperson playbook because if you don’t know where you’re going, chances are you will end up somewhere else."

So.... can anyone remember what we were talking about before our collective consciousness was eaten by political zombies and our brains turned into polenta? There is a lot to talk about but lets talk about just a couple critical related topics; the economy and the stock market.

Argentina: Why Malbec doesn't Flood the US

There's no substitute for visiting a wine region to get a true sense for the business. Tasting doesn't tell you strategy. Reading won't describe scents in the air. A travelogue gives you no indication of the heart of the people or the quirks in customs. For that you have to visit the region.

A few months ago I was given the opportunity to speak at the VIII Foro Internacional Vitivinícola in Mendoza Argentina. It didn't take long for me to accept the invite. In the U.S. I've tried many of their wines but wasn't that impressed, probably because I've never focused on the region and generally was drinking wines in restaurants that were over priced. But the buzz over quality Argentinean wines has never waned. Some of my clients even have vineyards there. So I saw this as an opportunity to broaden my understanding of the Argentina and get first hand knowledge. What I came away with was inspiring and mind altering.

Part II: Planting Decisions Are Different This Time

Changing Patterns: You're Mad if you Don't React.

The wine industry is made of family owned companies. Family owned companies seldom last past the 3rd generation in part because the family and business conditions that support the start of a business evolve over the years. Watching the clip above from MADMEN, you see the founder ask the question, "Why can't I just build on what I have?" The answer is a reminder that your customers needs and wants evolve, and you have to recognize and predict those pattern changes. 

To survive and adapt, a leader has to get out from behind the day to day world of running the business and ask tough questions about change. Today whether you are first or 4th generation, it's time to review the horizon because while the business continues to rebound, its not and wont continue in the same way it did in past recoveries as we discussed in Part I: The Long Term Future of US Wine Sales last week.

Just what specifically will be different in this recovery for the wine business? Its too long of a topic to discuss on a Blog so much of this I'll reserve for the State of the Industry Report due out in January of 2013. But for now lets just start with one segment: planting .... and maybe a little on pricing because they are related.

Part I: The Long Term Future of US Wine Sales

Don Draper, the Middle Class, and the Mad US Wine Consumer

Economically speaking, a luxury good is one with a demand curve that's straight up and down and a commodity has a horizontal demand curve. Practically speaking there's a lot of gray between the two and Luxury for American's is easier to segment into "need to have" (a vacation camping close to home) and "want to have" (a vacation at the Hilton in Rome).

There was a time when luxury goods were that: Custom goods manufactured for the wealthy. Mass Luxury? At best that was just an oxymoron. Back in the day, lettuce was not a luxury good. It came in fresh iceberg or older iceberg. There were no field greens mixed in a gas sealed bag replete with mustard greens and escarole. But when the boys came home from a World War and the Boomers started popping out and growing up, America grew a large appetite for something more than 'need to have' products. We desired, wanted and coveted the Jones' stuff next store. An exploding middle class was the catalyst that gave the Mad Men out there license to pitch our wildest needs and wants, and we consumed our way to prosperity.

Today with a shrinking middle class, displays of wealth politically incorrect, a waning Boomer, and a $9 trillion dollar hit to the net worth of America's consumers in real estate losses, can we still have Mass Luxury goods like we used to and more important, will we be able to afford them, and even more important still, what does that mean for wine?

How Will You Keep Up With Changes In DtC?

MJ Dale, KLH Consulting

This is part II of a piece on DtC by that most awesome of awesome women, Mary Jo Dale of KLH Consulting in Santa Rosa. (Check out the link attached to her name if you want to see what I mean by her awesomeness.)

Yes, you came to the right place. This is SVB on Wine, but as you know from last week, "A man has got to know his limitations," and MJ is leaps and bounds smarter than me when it comes to Direct Sales, CRM, Club Management, and current technology supporting all of that. Every time I hear her talk, I come away with something new. You have an opportunity to ask all the questions you want and not get charged her $5,000 an hour rate. (You just wasted $176 reading this.)

Enjoy Part II of Trouble in Paradise.

Is your Direct Program Punky?

Do Ya Feel Lucky ... Punk?

As Dirty Harry said, "A man's got to know his limitations." I know mine. I also know the importance of client acquisition, retention, and state of the art technologies that are available to retail wine operations and current thinking on integrating experience and product in DtC trade. But I’m no expert.

In a recent blog about CRM, tasting room, and DtC, I took a run at the topic and within the post tried to shame one "unnamed" expert into guest blogging for me to give you some street-level information. That shamed person is M.J. Dale of KLH Consulting in Santa Rosa, CA and she is one of the sharpest people I've met in the wine business.

So in a departure from the norm, while I'm away in Argentina MJ has graciously accepted my invitation to guest-blog and will offer a two-part piece on Direct Sales. I've handed her the keys to the car and she will be moderating the discussion, offering expert advice, and policing the rowdies... so you just watch yourself! 

Since Mary Jo makes a fair wage, it’s worth your time to get some free consulting out of her with your questions on the topic. You only have to ask yourself one question before you comment though: Do I feel lucky? Well, do ya.... punk?

2012-2013 Predictions on the Wine Business

Each year I take out my crystal ball, put on funny clothes and after my eyes roll into the back of my head for a sufficient amount of time, write Silicon Valley Bank’s State of the Wine Industry Report and make some predictions. I am a most fortunate soothsayer to be able to see so much of what is largely a private industry. Silicon Valley Bank has it's own data base of financial information, I produce various surveys throughout the year with more than 500 respondents, have direct contact with clients, prospects, suppliers to the wine business, relationships with distributors and large scale farmers, academia, media and I’m sure I’m missing an angle or two. That all helps to clear up the cloudy crystal ball.

Is The Wine Business Sustainable?

There is a lot of talk around the concept of 'sustainability' so much so that it loses its meaning. What makes a business - any business sustainable?

When you work in the wine business, you soon discover the reality is not the vision guests to wineries have. When a guest comes to a winery, they are greeted by owners and tasting room workers poised for hospitality. They have their best foot forward. And just like all of us, what you present to guests invited for dinner isn't reflective of the struggles you had during the day. In the same way, the wine industry puts out an image of a gracious lifestyle, but that's not the heart of the business nor is that what makes the business sustainable. This is a business that has its makeup and culture rooted in the reality that you really can't do this alone. At a minimum, you have to depend on God, Mother Nature, and luck to make a year. You have to depend on farm workers to execute and harvest on time in the right way. In fact its really harvest when that all comes together. That short window is all you get. That is a whole year's worth of sales and that intense period is the canvas that underpins the true culture of the community and in the end makes the wine business sustainable.

Can Wineries Increase their Bottle Prices?

Middle Class Mashed

Middle Class Wealth Back to 1983 Levels

That is a question all wineries are asking: When will they be able to meaningfully raise bottle prices and recover their margins? To get at the answer, you have to start by answering the question, what drove the prior pricing increase in the 90's into the 2000's? The answer is the middle-class and the Boomers.

The Great Recession wasn’t that great for anyone but it outright sucked if you were in the middle class. The middle class is that section of the population that was more likely to have lower savings, lower stock market exposure, and a higher percentage of their net worth centered in their homes. Since 2000, the middle class has shrunk in size, wealth, income and optimism about their future according to a recent report from The Pew Research Center. The impact of the weakening of the middle class will continue to linger and impair the wine industry's ability to pass on the higher costs of grapes for many years to come.

Is it Politically Correct to make a Profit?

What is the long-term outlook for the US wine business? Having been around the business for more than 30 years now, I can remember different phases in our industry's evolution and I'm constantly thinking about just what was happening to shifting demand and why, because those patterns can predict the direction we're heading next. I remember when there were 13 states that had reciprocal shipping laws and wineries shipped only to about 30 of them.  I remember when drinking was bad for you. In fact when SVB began in the wine business in the early 90s, we were just moving out of a time of a structural change that led to declining demand both in gallons consumed and per capita consumption as you can see in Figure 1 above.

Is California Wine At a Pricing Inflection Point?

 

 "Better to remain silent and be thought a fool, than to speak out and remove all doubt"

It's not easy deciding on a presidential candidate. The debate between Mitt Romney and George W Bush didn't help me. ......but that's not important.

What IS important is the Gomberg-Fredrikson Report for May shows cumulative bulk imports accounted for 19.3 million case equivalents shipped into the US in 2012; a whopping 167% increase. That's the equivalent harvest of 27,000 acres of US winegrapes calculated at 12 tons per acre.