While I was living and pursuing my passion in Italy, fresh out of Business School, I wrote these thoughts about the wine industry. I will admit the statistics (culled back in 2005) are somewhat dated, but from recent reports I have read, the wine industry has seen a continued trend in the direction I report. Although, just as fast as one's like can change, so can the world around us - we are all living with a (global) economic recession of galactic proportions that has already impacted some sectors of the industry. Knowing what I wrote then, and what is happening now, I am reluctant to make any predictions on the future of the wine industry, because as I have learned with winemaking, it is good to be patient and make decisions when the sediment has settled.
[Ten] years ago, a friend from Hollywood, who traveled regularly to the sets and soundstages of New York, introduced me to fine wine. When his day was done, over dinner at haute restaurants in midtown Manhattan, he would wax poetic about the Californian wines on leather bound lists that were larger than the scripts he would read. He talked about buying a piece of land in wine soaked Napa Valley and retiring. We drank Pahlmeyer, Caymus and Thackery. Names I knew only by the corks I saved from his dissertations.
I left each dinner with self-imposed homework. I began reading more about wine, then drinking it. I felt I was gaining an intelligence that allowed me to appreciate the wine we would drink on his next visit. Inevitably our friendship waned, but I continued my studies and began to refine my taste. Through the years since, I was considered an expert amongst my friends. However, in my mind I was far from an expert; I was an amateur connoisseur. Like most amateurs, I can confess to having hit or miss moments while drinking. Some nights, I will open a bottle of wine and capture the orchestration in the glass; I am able to identify with the wine's origins and create a memory the moment the grape juice touches my tongue. Other times, I fail in achieving such oenological delight and proceed to swill the wine, while throwing sobriety to the wind.
In September 2004, I took wings to an easterly wind and visited Sicily and the family of one of my fellow business school class mates. During the weeklong journey, we spent a day visiting vineyards on the southeast side of the island. When I returned to the States, it was not the Sicilian wine's fruitful finish that stuck with me, but the culture of the wine making process. I pondered the essence of this culture.
The Business of Grape Growing
Wine, in all its forms, is a packaged good. Wine is an industry that is ultra-competitive. Worldwide it tallies $225 Billion in sales, but the top 10 producers control just 15% of the market, in comparison, the top 10 brewers and spirit distillers account for 54% of all sales. Wine prices range from $2 a bottle to north of $2,000 for a taste of first-growth Bordeaux. Ask the MBA educated Brand Managers at Procter and Gamble if they would be interested in overcoming the barriers to entry in this market and they would certainly dazzle you with a “five forces” analysis of the question's stupidity.
But what I learned on the vineyard is how these winemakers produce a product of quality. The philosophy of wine is delicate. Wine is human. On the farm, the grapes are given a heart. During the growing season, the vines are like a mother during pregnancy. At harvest, the grapes are reared to produce the best quality juice. Then aged until they are uncorked. When uncorked, the wine will blossom in the glass throughout the drinking process.
Far from any classroom or boardroom, the values put into every vintage are textbook classic. The vines are cultivated by generations of family members with consistency of purpose. 1) The grapes are the product of your self. 2) Guide them down a path, but allow them to flourish on their own - with autonomy the product will ripen. 3) Polish the product and prepare it for market. 4) While in market, the product will reflect the company's care. However you translate this philosophy, it remains a poetic, although, a process that struggles with the speed of the developing consumption patterns in the beverage alcohol market.
Old vs. New World
Today, the wine industry continues to outpace its competitors. Some will argue that wine's growing popularity amongst consumers was bolstered by a medical report released in the 1980's that stated a glass of wine a day is actually better than the old “apple” adage. Twenty-odd years later, in 2001, wine sales in Germany overtook beer consumption and has a penetration rate of 70% of all households. In Australia, a new winery opens every three days. In the United States, the Yellow Tail brand (from Australia) is the #1 sold import – a couple of years prior, it did not exist. By 2010, the United States will be the largest consumer of wine in the world.
France and Italy are considered “old world” producers. There are 230,000 producers in France alone; many cultivating the ‘wine is human' process where “wine is consumed, not sold.” There is no marketing strategy. The best grapes from the best “terroir” are the best value no matter what the price. Terroir, or soil, is of utmost importance. Without it, you can't identify with the wine. You can't feel the wine. Consumers in the old world appreciate wine like a work of art - they will stand in front of a painting and make an emotional connection, without such a connection a memory will not exist. In the “new world,” such opinions about wine are still developing. Wine appreciation is still inaccessible to the masses. In America, 15% of drinking age adults consume 85% of the wine sold, and new world producers (American, Australia, Chilean) are taking advantage of this trend, and wine production is becoming industrial.
The new world is consuming the P&G model, the product approach, where the value proposition is different - low price points for high volume sales. An international marketing machine has been created that produces “standardized” wines. This model caters to consumers where wine is made through mass media. Dominate holding companies, like Diageo and Pernod are returning 15-20% of sales revenue into their marketing expenses for budget wines that command a price point in the $7 range. These producers are exploiting opportunities where there are obstacles for appreciation - inexperienced consumers, language barriers and limited imports. Retail outlets are recognizing these obstacles and consolidating shelf space to support sales that produce optimal returns. Wines with simple packaging categorized by red or white and grape name, i.e. Cabernet, Chardonnay, Syrah and Sauvignon Blanc, are delivering volume sales and the right balance of profit.
To Sell or Not to Sell
The new world is no longer new, it is established. Consumer attitudes and consumption habits are gaining traction, and the Darwinian philosophy of pushing sales will only continue the precipitous demise of the fragmented, old world producers. For example, in the United Kingdom, over last 15 years, wine consumption per person has doubled to 23 liters (or 2.5 cases) per year per person; however, old world - French, German, Italian and Spanish - wine sales have plummeted from 87% market share to 42%, while new world (American, Australian and Chilean) share has soared from 4% to 47%. Larger producers are succeeding in turning farms into factories and limiting the distribution opportunities of artisan (old world) wine makers. A global philosophy is dominating, a philosophy that takes cue from Coca-Cola brand management, where regional not central decision-making is helping profit margins. Brands of scale are being produced to identify with the market and not the product source.
If wine continues to be sold in this fashion, the low volume-high quality producers of the old world will have a few questions to answer. Is there a healthy balance between artisan wine making and commercialism? Is it possible to subsist on appreciation alone? How can you increase brand awareness, therefore sales, without the marketing expertise or dollars to do so? For many of these producers it is impossible. The investment for innovation, distribution and education through marketing looms large.
I have extracted my thoughts about the future, which were written in 2005, based on the notion that I am not in the game of predictions; even if, as I re-read them, some of them have come true. But when I look at the way I have predicted the outcome(s) of this year's NCAA March Madness, I don't want to put the cart before the horse. That being said - feel free to predict away. Would love to hear your thoughts on the future of wine drinking and selling.
Dan Petroski is Assistant Winemaker at Larkmead Vineyards in Napa Valley. Dan has an MBA from New York University and worked as an Ad Exec in New York for several years, before switching it up and trading his suit for a move out west.