State of the Industry

I got my hands on a wine consultant's takeaways from a recent "state of the industry" presented by Silicon Valley Bank, and thought I'd share. I was interested in how different the recent trends are vs. the broader secular story of growth in the United States, particularly the aspects I've put in bold:

"The wine industry is at a tipping point: Volume has flattened. Over the past 4 years:

·         GenX demand has grown

·         Boomers are flat

·         Millennials are showing no growth

Millennials are likely suffering from inability to afford luxury products (indulgence gap).

Profiles of target consumers:

·         Millennials are debt strapped (student debt, many are working jobs below their education level)

·         GenX are gainfully employed (biggest current earners)

·         Boomers are retiring; change in lifestyle, income, diet

Is this permanent?

Millennials creed: Live large but carry little.

Experience-based services are the fastest growing product category of all

Does premiumization have a future? Prices can’t rise when volumes are flat or falling.

Millennials in on-premise outlets are focused on activities, not alcohol. (e.g. ping pong, bowling, axe throwing, darts). Large supply of fancy drinks are more appealing and interesting than wine, utilizing dry ice, smoke, sparkle, flame. What’s the equivalent for wine?

Cannabis is likely not materially affecting wine at this time. Only 13% of the millennials have used cannabis as a regular part of their recreation. Much smaller % for the other two major demographic groups.

Tasting Rooms

·         WA, Napa, Sonoma traffic is down

·         OR, VA are up

·         NY is mixed

Millennials don’t like conspicuous consumption or wealth.

Most successful TR’s are activity based, by creating an “engaging” environment, (e.g., picnic tables, corn hole type games, walks through the vineyard/cellar.) Sitting or belly up to the bar is not attractive to this group.

...

there is about a five-year window to address this issue of no growth."

Lafite in China

It appears that 1) Lafite in China did not release in 2015 as expected in the case. Up till 2018, the wine still was not released, signaling the difficulty and challenges of producing wine in a region with relatively unknown land, operations, and government relations.

Additionally, the local investment partner that Lafite had CITIC exited the investment in January 2018, before the wine was released. This also shows concerns about the wines to be released, as well as the future of Lafite China.

Source: https://www.thedrinksbusiness.com/2018/01/lafite-and-citic-officially-part-ways-in-china/

Funky Wine, Funky Cheese

On Wednesday night, I had the pleasure of joining a group of fellow Wine Circle members for a wine and cheese tasting event led by none other than our very own TA, Sarah Hoffman. We tasted a variety of whites and reds from the New World and the Old, and enjoyed a delicious sampling of cheeses from Bellwether Farms.

Out of all the pairings, one in particular really stood out to me. I was surprised to find the wine that I initially liked the least ultimately became my favorite, and all because of the amazing flavor marriage between it and the cheese. It was the third pairing Sarah led us through, a combination of a Domaine Des Carlines La Vouivre Chardonnay 2016 from Savagnin, France and a slice of 'Bellwether San Andreas', a raw sheep milk cheese inspired by the aged sheep milk cheeses of Tuscany. 

On the nose, as a fellow Wine Circler noted, this wine had some serious "stank." It was hard to put my finger on just what the smell was, but it was undoubtedly funky. It also had a cloudy appearance in the glass, which,  combined with the smell, definitely made me consider passing up on that particular round of tasting. But the wine definitely wasn't corked or turned. Was this perhaps that "barnyard-y" brettanomyces smell I had read about in our readings? Whatever it was, I assumed it was probably due to a more traditional production process than my relatively New World palate was used to. (Research after the fact did indeed confirm that the La Vouivre is naturally fermented, and goes through neither filtration nor clarification. ) So, I told myself, soldier on! 

Taking my first sip, initially all I could taste was a lingering quaff of that same rather off-putting funkiness. Eventually, though, it gave way to some really pleasing notes of pear, green apple and a bright minerality. I asked myself if this juice was worth the squeeze. Was this complex Chardonnay worth the stinkiness tradeoff ? And, even if I could get over it, was this a wine I could ever feel comfortable serving to guests at a dinner? Maybe, I thought, but this was probably not a wine that would be a repeat buy for a more casual wine consumer.

All this changed after a bite of the Bellwether cheese. The creamy mustiness of the aged sheep cheese complimented the funkiness of the wine in a way I could have never imagined. Suddenly, both wine and cheese were gone far too soon, leaving me wishing for second helpings all around. I've enjoyed many a pairing in the past, but this really illuminated how powerful a pairing can be. It truly was greater than the sum of its parts. Days later, I am still brought back to that magical marriage, and not just from a taste perspective. I think there is a significant marketing lesson to be learned here. For those "stanky" wines in need of broader distribution to a less funk-loving segment of customers, I think there is huge opportunity for them to be sold alongside complementary and similarly funky cheeses. The right pairing could be transformational for both the consumer's wine drinking experience and the producer's bottom line.

1st Amendment

We discussed briefly in class the apparent contradiction of the 1st Amendment and the intricacies of the Tied House laws related to the 21st Amendment. On the surface, prohibiting tweets that appear to serve as advertisements seems absurd. However, even when there's no conflict between two separate sections of the Constitution, restrictions on certain forms of speech seem to be both reasonable and within the bounds of the law. One of the most common examples of this is yelling "fire" in a crowded building (that is not on fire) with the intent to mislead people into a state of panic that could cause injuries. Another example is verbal assault / hate speech, although in my view restrictions on this form of speech should be limited to inherently injurious speech rather than focusing on the subjective interpretation of the speech by the listener (due to the dangers of allowing a "heckler's veto" in public discourse).

Neither of these examples seems like a truly analogous comparison to the limitation of the 1st Amendment that we discussed in class. However, I have been trying to think of other more relevant examples, and I wonder if a comparison can be made to insider trading. If I receive some MNPI from a friend at a public company then trade on that info and post the info here so that you all could get in on the action too, it would be ludicrous to defend my actions as an exercise of free speech. I would be using speech as a way to circumvent the law for my own economic gain. Similarly, it seems plausible to argue that the tweets in question in the Tied House cases are not protected speech after-all - the companies are just using speech as a way to circumvent the law for their own economic gain.

P.S. Even if the Tied House laws are "legal," personally I don't think they (and all the other convoluted policies stemming from the 21st Amendment) are good policy.

P.P.S I have no legal training, so please excuse any glaring legal naivete you notice above.

When A Wine's Mountain's Are Blue

I grew up in a Coors Light family. As long as I can remember, any significant family event, sports game or holiday has always been accompanied by Silver Bullets. Therefore, alcohol in a can is a no brainer for me. This is especially true if the design on the can changes color when it's cold.

Last quarter I received an email about a startup garage duo, our very own Sarah and Kendra, conducting product testing/customer feedback on canned wine. I had never heard of canned wine, but my lineage of canned alcohol consumption led me to sign up for the product feedback session. Here are a couple of the major takeaways I had from that event.

1. There is way more canned wine on the market than I thought. The night of the tasting Sarah and Kendra had at least 12 different canned types. Many of the wines were what I would call "beach wines," like sparkling wines or roses, the type of wine you might want on the beach. Others were of the much more traditional varieties cabs, chardonnays, etc. The wines were from more than a handful of companies that were experimenting with different sized cans and packaging types.  

2. The variety of canned wine packaging made it clear that different canned wine producers are going after different parts of the market. Going into the night, I assumed that canned wine was going to targeted towards young people who are doing some kind of activity that prevents them from having a class bottle of wine (hiking, swimming, pic-nicing, etc.). However, there were several canned wines whose intricate labels/packaging led me to believe that they are going after a more affluent customer, who is drinking the canned wine instead of a bottled wine for non-logistical reasons.

3. Canned wine isn't so bad. Keep in mind that this is coming from someone who knows they don't have a good palate, but I actually liked many of the wines. The cans are much easier to hold, open, transport and the wine tastes pretty good. I certainly felt less classy drinking wine from a can than from a bottle, but that's OK with me..... almost anything is a step up in class from Coors Light. :)

With All the Best Intentions

I find the ludicrous effect of the 21st amendment on the sale and distribution of alcohol in the United States fascinating.

When I went to look up the exact working of the 21st amendment, I was surprised by how short it was. Initially frustrated, I thought I was dealing with websites getting cute and truncating the notorious second section, but this is all there is: 

The transportation or importation into any State, Territory, or Possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.

State control is a funny thing. I remember being shocked the first time I visited California and saw bottles of wine and liquor in a convenience store. It never occurred to me that the laws that prevented such an occurrence in New York were local ones. For those of you who don’t know, hard liquor and most can only be bought in liquor stores or wine shops. Grocery and convenience stores can carry beer and very bad “wine” that usually isn’t more than 5 or 6% ABV. I’m still slightly caught off-guard when I see the piles of wine bottles at my local CVS.

I’m struck by the parallels the 21st amendment has to the 13th, and how a succinct collection of words creates a strange legacy for the modern world. Section one of the 13th reads:

Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

The consequence of this is modern day slavery. Prisoners can be compelled to labor without the protections that other workers have, and for little to no compensation. While the crafters of this amendment lived in a time when they may have thought this was a justifiable punishment for crime, a much smaller proportion of the nation was arrested and convicted then. And if we remember that some percentage of incarcerated people did not commit the crimes for which they were imprisoned, we must contend with the fact that there are innocent people who are legally enslaved in 21st century America. 

Given the difficulty of changing the constitution, should enforcement mechanisms and loopholes really live there rather than in laws?

Government-Induced Stress

As Sri noted, the government shut down is causing a big headache for wineries looking for COLA (Certificates of Label Approval). This impacts new wineries like mine (Birdhorse) even more than established small wineries. When the news of the government shutdown hit, we sprang into action, figuring we could at least get our labels submitted into the queue in order to be near the top of the list once they started processing. Unfortunately, this is when we learned that someone needs to manually approve first-time registrants for access to the COLA online system! And since the government is shut down, there's no one to do even that. Therefore, the queue is building and we are basically up the creek.

Once the government reopens, we will have to go through the COLA registration process. This historically took about 6 days. Only after we've been granted an online account (despite having been permitted and registered with the TTB for months), then we enter the COLA queue. Historically, it took about 36 days for a wine label to be approved. Unfortunately, the TTB stopped processing COLA accounts as of 12/20 and wine labels as of 12/18. So, we'll have at least a month's backlog on top of the normal processing times. I just hope it's not worse.

This causes real operational problems for us. We have decided not to print and to wait for the COLA, because we can't afford a reprinting should the TTB have edits. The downside here is that we need to bottle in March. Typically, bottling and labeling can occur together in a nice, mostly automated fashion. In the increasingly likely event where we don't have approved printed labels in sync with our bottling time, we will have to bottle and then later manually affix our labels.

The government shutdown has not yet caused a top-line issue for us, but that is the next worry should it continue further into record territory.



https://www.ttb.gov/labeling/processing-times.shtml
https://www.ttb.gov/formulation/registrations-processing-times.shtml
https://www.ttb.gov/labeling/colas.shtml