Santa Karma is Sending You Money in 2015

Putin Claus

This is a wonderful time of year to be a banker in the wine business, or more specifically, it's a wonderful time to be me! ...... holiday parties, presents, my office filling with client wine gifts keeping me in a jolly mood through the holidays, and then my birthday  - which falls on Christmas Eve just in case that slipped your mind this year?
 

The birthday part was a mixed blessing growing up in a family of six kids, and that cost me years of therapy. But I'm better now. I've learned to be thankful for all things, and this year in particular I'm getting my birthday AND Christmas wish; about $2 trillion in stimulus from World Despots.

The Highest Return on Your Time Invested

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.

Mid-Year State of the Wine Business

There are several thingies (......that's a technical economic term) that are happening right now that all link together in some form to drive components and the present direction in the wine business. Since this is a blog though, and blogs are generally top of mind and brief, discussing the state of anything is going to either violate the Constitution of the Blogosphere or the tenants of mildly meaningful research. Instead, I'm going to leave out a pantload (......that's another technical economic term) ... of discussion topics such as demand for wine, and go with the top 4 thingies worth pondering at this point in the year.

• The first thingy is water. There isn't any as the video above portrays. That's not good. And it's not just  a Central Valley thingy. This water thingy is running throughout the Ag. and wine industry and will only get worse.
• Second is the heat wave from the past week. Early discussions suggest the heat will reduce expected crop size by 10% plus or minus due to sunburn from the recent record heatwave. A related issue vis-à-vis supply is the size of the world harvest in the Southern Hemisphere.
• Third is rising interest rates. That does all kinds of thingies to the wine business.
• Fourth: the world is shrinking and so is the market share for US produced wine.

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?

Cigarettes, Lot18, Fred Franzia and Wine Inventory

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.

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.

The Best President for the Wine Business is ....

I Lied .........

Think Its a Tight Race?

I admit it. I said last week that SVB on Wine would be going on hiatus until January while we are producing the Annual State of the Industry report. Well .....I guess I lied. Shocking! A banker who lied? I guess that makes me eligible for public office though. ....hmmm....upon further reflection ....nope .... unlike President Clinton who never inhaled but he did lie, I did inhale ... once ... as an aspiring musician but it was a job requirement. Nonetheless, that makes me unfit for public office and as a colorful Senator once said, "If nominated, I shall run to Mexico. If elected, I shall fight extradition." I mean really, who would want to run for public office these days and endure the mud-slinging and digging into the mistakes in your life? We've made office fit only for people who never made a mistake, or were never caught in a mistake.

Moving on to the topic at hand, many people seemed pretty engaged on the piece we wrote last week that discussed Argentina and the negative impact their Government has on the wine business. After watching the feisty Presidential debates this past week, I said to myself .... "Self? Which of the two candidates is best suited to help the wine industry for the next four years?"  'Myself,' predictably didn't answer me, so I've decided to go against my better judgment and toss it out for a discussion topic this week.

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?

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.

Is 7%-11% growth in US Fine Wine disappointing?

Up to the spring of 2010, I wasn't the most popular of prognosticators. Prior to the crash I started handing out predictions as I saw things, a housing bubble, large market corrections, etc. Strangely, after the first gloomy prediction my literary agent stopped getting any calls for book signings and speaking opportunities. “Call someone that's not a Debbie Downer.” I was a pariah, a leper, an outcast with the likability of an attorney from the WSWA. Then last year when I said we were at the beginning of another long-term period of growth in fine wine, the phone stared to ring. I was once again quotable and in demand for speaking engagements. What’s the old saying? Failure is an orphan, but success has many fathers? That's why it's particularly disappointing for me to throw a little cold water on the wine recovery.... but let me emphasize the adjective 'little' because its a measured mid-year course correction, doesn't change the growth forecast, and I still want to get some speaking invitations.

Neo-Prohibitionists are Alive and Well

Taxing alcohol will save us from all sorts of ills, or so many would have you believe. Here's a quote that got my attention this past week:

 "Returning alcohol taxes to their 1977 levels (when the government collected $57 in 2009 dollars per gallon of alcohol) would raise an additional $18.5 billion in revenue across all levels of government -- and also lead to reductions in drunk driving, violent crime and disease."

But things aren't always what they seem. Remember the recently concussed CARE Act? ..... "To keep your kids and communities safe." Somehow I don't think that bill was about our kids or communities. I know, call me a cynic.