I'm betting nobody knows who Thorstein Veblen is. Like this picture, you have to be a little cockeyed to know him; be a Jeopardy Champion, enjoy thumbing through pictures of people who look like axe murderers, or maybe you are an economist with little to do with your free time except refresh your memory about a Veblen good?
One on-going debate in the wine business where Veblen's theories play a role is price discounts. Should you discount, and if so when and by how much? To get at an answer we'll review some economic basics. (... I know how exciting that sounds but stick with it. I won't kill you with math.)
I know the above chart is a little hard to read. When I start working on the Annual State of the Industry Report each year in October, the industry starts off a little hard to read too. I kinda go into this almost shipwrecked mode and cut myself off from normal business interactions and then a combination of research, survey, interviews, and analysis eventually gets me to a point where I can start writing and eventually escape my self-imposed marooning.
What I hate about the delay between finishing the report and publishing, is the world moves substantially at times and my predictions are out in the wind hanging there .... exposed to the elements for all to see. If my predictions were off when the paper is released, who wants to read the rest? Or, if they were on they can still sometimes be a retrospective view by then if events move quicker than expected. It's a little unnerving during the wait, but you'll have to tell me how I did when you read the report and watch the Live Videocast.
The State of the Industry report for this year is going to be released January 21st along with the live video broadcast. If you haven't, you can still sign up for that here: [register].
Each year I get to write a State of the Industry report that's pretty well received in the wine business. Its even used as part of the curriculum in several U.S. Colleges and Universities which my mom thinks is really cool. She thinks I should be given an honorary PhD by one of the Universities but I haven't been able to donate enough money to a place of higher learning so as to receive that kind of recognition. Der Weinerschnitzel is considering offering me a fellowship, but thats still in early discussions.
Here's a late edit to this post: If there are 6 pigs in a 7 pig python and the python doesn't ....er ... pass one of the pigs, how many pigs can the python eat?
To really understand what's going on with inventory, you have to get a handle on the whole chain: Consumer demand, depletions, distributor supply, winery supply, imports, bulk wine supply, forecast harvest yields, and non-bearing acreage. I spend a great deal of time trying to sort through each of those to get a sense of what is coming next for the producers. Its a nerdly existence but it helps the winery clients who bank with me so I take the time, research, read, and talk to a lot of smart people.
About six weeks ago I was asked to speak about the economy, the environment for the US wine consumer, and the fine wine business. The meeting was part of a management retreat for a large wine company and included an acquaintance of mine who we will call"Deep Gullet." It included many of the distributor partners of the company as well so there was quite a wide perspective on the business. This wasn't a client of mine and never will be, but I took the invitation because I thought I might learn something from Deep Gullet and the other presenters. I did and came away with two important perspectives:
The small 2011 vintage was really difficult for fine wine distributors. Allocations were more the norm for their retail accounts because there just wasn't enough wine produced.
Attempting to increase bottle pricing - even in an allocated environment has been like pushing a wet string up the hill.
Overwhelmingly everyone believed 2012 was going to be a lot better from a supply perspective given the large and record harvest, so the allocation issue was probably temporary. The second issue however was about the consumer and that didn't seem to be going away. That got me wondering again about the popular press reports on supply shortages.
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.
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?
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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Many in business view another competitor moving into your territory as an affront to all that is fair and decent. Its the moral equivalent of "I was here first." Sometimes that kind of in-your-face competition is truly a net sum zero game. For example, there was a small drive-thru coffee station in the shopping center I frequent, but one day Peat's Coffee moved in. They survived about a year but now the drive-thru is closed. There are plenty of examples just like that but other times, competitors and related businesses cooperating together can have a positive impact on business conditions and instead of waring, can come together and win together.
Mario Draghi was in the news this past week concurrent with the Preliminary Grape Crush Report. Both are related. A weak Euro and oversupply are not the best combination. Thankfully, we are not presently oversupplied nor is the Euro weak, but where is it headed?
Have you ever found yourself disbelieving your own eyes or being flabbergasted at a decision that defies logic? For instance, what would happen if you sold all of your wine for less than it cost to produce? Or how about making legislation that made the possession of cigarettes illegal? What would you say if someone told you they wanted to try and change WallMart into Nordstrom? Those are all placeholders for a discussion on business strategies and odd news from last week.
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.
Talking to a US producer the other day about his Chinese exports, I asked what I should tell others about selling in China. He said tell them, "Come on in. The water is fine." Really? Is it time to jump in and export?
Clearly their consumers are growing in their taste for wine. As producers they are now 5th in World Production. Today in their 10 growing regions, there are more than 800 wineries. Seventy percent produce less than 60,000 cases. The largest 6 wineries are responsible for 70% of total Chinese production.
Hong Kong with a serious lust for wine dropped its import duty to 0% about 5 years ago. Since then the volume of wine traded in the region has spiked, and as demand has grown some of that wine has made it into China without the 41% duty required for imported wine to the mainland which is raising eyebrows among the protectionist ruling party.
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.
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.
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?
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.
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.
You are a with-it kind of person so you probably recognize the acronyms in the title stand for Social Media and Customer Relationship Management. You are so together, you probably have your Facebook and LinkedIn accounts with more than 500 of your closest friends and colleagues connected. You have a Klout score. You have a smart phone and check in with Foursquare at every occasion. You’ve even started tweeting twice a day about such fascinating things as, "Happy #FF" and "Isn't it a beautiful #DAY all my peeps." And the result of your social dalliance with SM on growing your sales is?..... Absolutely Nothing. Nada. Zip. Zilch. Zero. What is going on? Where are all those Millennials who are supposed to be Tweeting up a storm and rushing to your door. If you do Social Media, they will come! ...... won't they?
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.
