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/

Brand Wars

Prior to this year's Super Bowl, I had no idea that corn syrup was an ingredient in beer. But like most Americans, I was confronted with this fact (over and over) as Bud Light rushed to smear Coors and Miller Lite. Being anything but a fan of Bud Light, I can't say the ads had much of an effect on me. However, I did feel the shot across the bow that Miller and Coors must have felt (and in much greater magnitude). As I read today's WSJ, I learned that Bud Light had not only angered Miller and Coors by this attack because of its surface level implications, but, more importantly, because the major beer brands had actually been working in concert, behind the scenes, to launch a Got Milk? type campaign, to help combat the waning consumption of beer. In fact, while other forms of alcohol have largely been on the rise since the 1960's, beer consumption has only dropped since the 1990's. In order to get ahead of this trend, it appears that the major beer companies wanted to pool their marketing budgets and reaffirm that beer was the right choice for the American alcohol consumer. Bud was now threatening this alliance and showing that it could not play fair.

Much of the discussion in the wine class, particular about the "buzz" wars with cannabis, has obvious parallels. However, since wine has so many more producers and actually thrives on variety, it seems that a similar campaign would actually be much more possible and productive. An alliance of wineries across the US could easily drum up significant financial support and could also raise awareness of the benefits of wine. The campaign could easily be structured around health benefits, paired with regional travel or even push forward environmental awareness based on the practices of viniculture. Without even having to come out and criticize other buzz-generating products (i.e. not taking the Bud Light approach), wine could come out as a step above the other buzz items (which is entirely on brand).

The God of Wine

It strikes me as both fascinating and deeply culturally revealing that the Greeks and Romans had a God of Wine: Dionysus, to the Greeks, and Bacchus, to the Romans.

Definitely very passionate about grapes. Exhibit A, the bunch he wields like the tip of a spear in his left hand.

The long list of things Dionysus was the God of is astounding. Not only did his jurisdiction cover wine, but he also was the God of winemaking, grape cultivation, fertility, ritual madness, theater, and religious ecstasy. I find it incredibly intriguing that through Dionysus, Greeks and Romans associated wine with fertility, madness, theater, and religious ecstasy. Thematically, a sense of loss of agency and exaggeration courses through Dionysus's veins.

As one of the twelve Greek Olympians, Dionysus stood on the helm of celestial power, yet he was inherently an outsider. Dionysus was a demigod: half man, half god. The son of Zeus and a mere mortal woman.

The legend goes that Dionysus was born among mortals in order to be hidden from Hera, Zeus's envious wife. Dionysus cultivated grapes, invented wine, and went through Asia teaching mortals how to make wine. He is known as "the liberator" because his gift to mankind -- wine and joy -- liberated mortals from societal constraints.

Life's incomplete with reds and whites - meet the blue wine!

About one or two years ago I run into this particular product in the news... a startup was trying to challenge the traditional market of wine with... blue wine!?! It sounds weird and crazy, but wait to see how it looks! 

Apparently, the color hear is not meant to change the flavor but to make the visual experience different and interesting when drinking. Indeed, blue wine is still made from wine grapes. (However, the regulation of some countries do not (yet) recognize the wine as wine - how can it not be red or white!?!)

And why Blue? In psychology, the blue colour represents movement, innovation and infinity. It’s also a colour frequently associated with flow and change

For instance Gik is a Spanish wine company whose blue wines are made from a blend of red and white grapes. It is known to be a "chilled white wine with organic pigments (anthocyanin, from the skin of red grapes, and indigotine) and yields a sweet, crisp flavor". 

But even if it started in Spain, the trend has arrived to the two other largest and traditional wine markets: Italy and France. Saracini is an Italian wine company that makes a variety of avant-garde and classic wines.  Blumond® is their sparkling blue wine.  Technically, it’s a Prosecco mixed with blue curaçao.  It has a vibrant light blue hue and presents a sweet, peachy flavor.

The curiosity of consumers has made these two brands successful and available all over the world. Gik can be found in more than 30 US states, after having pre-orders of more than 30,000 bottles before the launch of the product in the US. The wine is intended to attract millenials, being sold in the website as "Blue, the instagrammable" and has a price of $16. 

If by now you are curious too and want to try it, don't expect to find it in Trader Joe's (yet) but you can find it online easily! 

Chandon's Bet on Asia

I found it very interesting to look into Chandon China and India, marking LVMH's bold bet into emerging wine markets.

Breaking this down from LVMH's overall financials, we see that wines & spirits comprise 12% of LVMH's overall revenue as of 2017:

And within the wines & spirits segment, we see that revenue is over $5B as of 2017:

Zooming into geographic region of delivery within wines & spirits, Asia comprises almost one third of total revenue:

Suggesting that Chandon's investments in China and India have hit the runway with much success. A glance at their promotions is stunning:

Balloons emulating grapes?! What a move. Since 2013, Chandon's bet on premium sparkling wine in China has soared -- they invented the category in China and have set their roots. According to their website:

Located in the north of China, at the heart of the Ningxia Hui Autonomous Region – one of the country’s largest winegrowing areas – Chandon China was founded in 2013.The region’s exceptional climatic, environmental and geological conditions convinced a team of international experts to establish the estate in this protected terroir. The area is ideal for growing chardonnay and pinot noir, two varieties that are essential for creating sparkling wines using the classic “méthode traditionnelle” style.

When I go back to China to visit my relatives, I'm not going to forget to ask them about Chandon's sparkling wine.