Product Dis-Placement

“If anyone orders merlot, I’m leaving. I am not drinking any fucking merlot.”

In 2004, the comedy Sideways raked in five Oscar nominations, and obliterated the Merlot industry.

Following two middle-aged men on a jaunt through the California wine country, the movie was rife with easter eggs for wine nerds, and many a pointed barb aimed at a single, unfortunate varietal.

Nearly overnight, Merlot sales plummeted. Prices of Merlot bottles fell by up to 10%.

The Wine Industry called it the “Sideways effect” - perhaps the most famous example of product dis-placement in film.

How fickle a society do we live in, that a single movie can trigger an appreciable impact on an entire industry?

Sideways is hardly the only example of pop culture triggering radical, immediate changes in consumer demand.

In the 1934 film “It Happened One Night,” Clark Gable takes off his shirt and reveals he wasn’t wearing an undershirt. Sales of undershirts supposedly plummeted by 75%.

Buster Rhyme’s 2001 hit “Pass the Courvoisier” triggered an increase in sales of the cognac of 10-20%.

Kylie Jenner’s 2018 Tweet “Sooo does anyone else not open Snapchat anymore?" wiped $1.3B off Snapchat's market cap.

Since Game of Thrones began airing, there have been over a thousand baby girls named “Khaleesi.”

Whether it’s James Bond’s recent love affair with Heineken or Wendy’s dishing out shade on Twitter, brands are trying their best to have the winds of pop culture blow in their favor. But in an age of authenticity, it’s perhaps the throwaway joke that can make the biggest impact.

Myth or reality: is expensive wine better for your health?

I’ve often heard people saying that you shouldn’t drink cheap wine because it’s bad for your health and even that it gives you more hangover than expensive wine. Apparently this is far from true. As Peter Mondavi said in his visit, the difference on the price of their more premium wine Charles Krug vs. their lower price point wine CK Mondavi is mainly due to difference in the cost of the grapes and the fact that the more premium wine has a higher margin. This has no implications on the health benefits/impact of drinking the two wines.

This article further explains this: https://www.shape.com/lifestyle/mind-and-body/your-two-buck-chuck-habit-hurting-your-health

An interesting quote from the article: “Red wine boasts loads of health benefits—it contains antioxidants like resveratrol and polyphenols, which help fight inflammation; it has been shown to protect against heart disease; and it has been shown to stave off decline in memory as you age. But a fancier merlot is not going to give you a stronger dose of those benefits, says Molly Kimball, R.D. For her, the question of whether expensive wine offers more health benefits is pretty cut and dry. "There's not even a maybe. The price wouldn't matter.”

Burgundy Price Bubble?

This morning on The Economist's daily podcast, there was a discussion of a potential bubble for the price of wine from Burgundy. The piece was a follow-up to publisher's article from early January on how amateur investors have pushed up prices in recent years, aided by increasing liquidity on exchanges such as Liv-ex (privately negotiated transactions only require a transfer of title).

While fine wine has long been seen as an appreciating asset, the high costs associated with storing the product and other friction costs (shipping, handling, taxes, etc.) have made it a highly illiquid asset. However with the rise of electronic exchange platforms, such as Liv-ex, the estimated transaction value of wines traded on the secondary market has risen from $1bn in the early 2000s to $4bn today (of which only ~15% of purchases are done so with the intention of drinking). 

Interestingly, Bordeaux, which used to account for ~95% of secondary transactions in 2011, now only accounts for ~60%, due in part to softening demand in the Chinese market (suspected reason is crackdown on guanxi) as well as high price levels. In its place, the value of Burgundy has risen by 50% over that same time, aided by it being a well recognized wine region with iconic names / brands (required to preserve resale value). Its trade share on the Liv-ex exchange has risen from <2% in 2010 to >14% in 2018.

Like other physical assets, the price of fine wine is largely determined by the degree of supply constraint. Burgundy, as a region, produces far less wine than other well-known region; Burgundy's top estates produce up to ~25-30x less their equivalents in Bordeaux. A rapid rise in demand can often result in a speculative bubble in such a market. 

In traditional macroeconomic thinking, a yield curve inversion is a strong leading indicator of a market correction and / or recession. In the case of Burgundy wines, there has been anecdotal evidence of younger vintages have started to become more pricey than older ones, suggesting an equivalent to a yield curve inversion (unfortunately I haven't been able to find a good chart showing like-for-like secondary prices by vintage). However, Liv-ex points to the fact that there is decreasing trade count in Burgundy wines, with a simultaneous rise in trade value, which has largely accrued to the Grand and Premier Crus (two highest classifications). In their words: "Fewer trades at ever higher prices points to a narrowing of liquidity. Possibly a speculation bubble."

In case you find this topic interesting, you may consider signing up for (free) periodic News & Insights updates from Liv-ex, which has put together a rich library of market analysis. I'm linking here their deep-dive into the Burgundy wine market from earlier this month.

Sources:

(1) https://www.economist.com/finance-and-economics/2019/01/05/amateur-buyers-of-fine-burgundy-fear-a-speculative-bubble

(2) The Economist's The Intelligence podcast, February 25, 2019

(3) https://www.liv-ex.com/news-insights/

Sangria: My favorite kind of fruit salad

Though I fully believe that sangria is one of the most perfect drinks for a hot summer day, I have a hard time imagining how someone made the leap from a fabulous, full-bodied Rioja to the sweet, fruity concoction that I sip poolside. Who do I need to thank for this fabulous innovation?

Turns out, sangria actually originated as a health elixir. In the days of the ancient Greeks and Romans, water was bacteria-filled and unsafe to drink, so people drank wine (a much lower alcohol version than the wine we drink today) instead. The foodies among them started mixing their mediocre-tasting wine with sugar and spices, creating a beverage called “hippocras” that was a precursor of today’s sangria.

Versions of hippocras were drunk throughout the former Roman empire through the middle ages. Over the years, people realized that the combination of sweetened wine with spices was actually pretty good. They eventually started to add fruit along with the spices, and boom – the sangria that we know and love was born. Reportedly named for the “bloody” hue of the classic red wine-based drink, sangria remained a mostly European secret until it made its New World debut at the 1964 World’s Fair in New York.

Since then, sangrias have taken off. They can be made from virtually any base wine – be it red, white, rosé, or sparkling – and have become the perfect accompaniment to any activity that involves weather over 70 degrees. Recipes vary widely, with combinations of wine, fruit, and spices that can be shaped to fit individual tastes.

A word to the wise, y’all – spring is coming. It’s time to start experimenting with your own recipes before picnic season kicks in.

Sources:

http://www.sangriasecrets.com/the-history-of-sangria.html

https://www.foodandwine.com/fwx/drink/everything-you-didnt-know-about-sangria

https://vinepair.com/articles/the-history-of-sangria/