Vol. 3 No. 1 First blog of the year and what a year it could be for the wine industry

We are only 19 days into the new year yet a huge number of things that will affect the wine industry already. I will recap some of them from industry sources and my  own observations. Here goes:Winery sales – late last year the Vietti winery in Piemonte, Italy, was sold. Having visited with the patron, Alfredo Currado, some years ago, it was with a touch of nostalgia. The good news is this: his son Luca will continue as winemaker and chief executive. That is good news and comes a year after the American, Kyle Krause, purchased another Italian winery, Enrico Serafino. Krause has made a point of letting the prior owners continue to run the winery, and Vietti’s case that is one of producing high quality Barolo’s, and other fine wines. Krause says that it is to have a stake in his Italian roots. Earlier this month Stanley Kroenke, a billionaire who owns both the Los Angeles Rams and the Denver Nuggets and also Screaming Eagle vineyards, bought Bonneau du Martray vineyard, producer of perhaps the best Corton-Charlemagne, and has been owned by the same family since the French Revolution.In Burgundy sales are infrequent, especially one of this pedigree. I believe he too, will not change the operations of the winery.

Just yesterday, a Bloomberg article said perhaps half the U.S. wineries might be sold over the next five years, and recapped the sales mentioned above. This is not uncommon in Bordeaux, especially since 2008, when the Chinese went crazy (there is no other word for it), bidding up the prices of the best cru’s.

But here is the paradox: as wine has increased in popularity, and especially since the billionaires began buying up wineries and land, most producing small quantities that become cult wines, and with the help of flying winemakers and 100-point rating systems the price of the wine goes off the charts. In other words, they can only be afforded by ‘their kind of people’. But as I have pointed out in previous posts, several things have happened on the way to the wine shop:

  • The price jump that had occurred ever since Robert Parker created the 100-point, in reality 50-point system since the first 50 are a given, no longer causes the price of the wine to jump as it once did. While the intent was good, there are so many raters that if you can’t get a 90 from one of them, you should either stop making wine or sell the operation.
  • As commented on in this blog numerous times, globally, good wine is chasing out bad, but as that happens the number of wines in the next higher price group keeps increasing. 2015 was the first year that the fast growing segment was the $10-20 range. Prior to that it had always been the Under $10 category. Once you get above $30 it is stagnant. What is happening is basic economics and now just because your formerly $30 wine gets a 90+ rating, the price no longer jumps to $50, and so on up the wine chain. What’s a winery owner to do?
  • To understand this, we have to go back to what agriculture is in economics: is is a competitive industry where there is no pricing power. When I, in my former life as a wine snob went to ‘an uncle’s winery of a new-found friend, I thought nothing of it. However, it turned out his uncle was Joe Heitz! After spending the main part of an afternoon with he and his wife, I was hooked on this man’s personality and philosophy. What is wine? Agriculture…farming…nothing more, not romantic, and as such no matter what you are able to do, god and nature have the last word. That is humbling to anyone, but especially to people who are dependent on cashflow for their solvency. I came to this realization a couple of years later when I went to work for Merrill Lynch in San Francisco as an institutional bond salesman. Seeking to combine business with pleasure, I contacted all the big wineries…even Mondavi…and the story was the same: you grow the grapes, make the wine, bottle the wine, sell it to a distributor and wait for the money to come in so you can begin another year. Cash is always tight – except for one I contacted: Gallo! Gallo had millions at Bank of America and I saw an opportunity. When I worked for a bank I learned that BofA always…always…had excess cash so they were a SELLER of funds, not a buyer. I moved the banks money to two other banks and earned as much as 25 basis points more on it (0.25%!), and that was on over $100 million a day! So I told the money manager at Gallo that I could help them earn at least 25bp’s over what BofA was paying them. He said, “you know it, I know it, but if I did that even once I would be fired. Fired? You have to remember the relationship of the Gallo’s to their bank, then run by A.P.Giannini and a fellow Italian…that added to trust but mainly A.P.’s word was his bond. I believe at least until the bank was bought by Nations Bank, they continued to only deal with BofA.
  • Now if cashflow is your biggest problem, along with the things that can come up unexpectedly like phyloxera, glassy-winged sharpshooter’s, Pierce’s Disease, frost, late season hail, drought and more, you have to have a marketing plan. As your unsold wines decline your storage costs stop declining with them once you get to a certain level. Do you dump them? In the old days, that was an option but what if you are producing a $100 cab and have 50 cases left? Do you have your distributor take it off your hands or sell it to Trader Joe’s and see it on the shelves for $40 or less? Once that happens it is difficult if not impossible to get your price back up, and as more and more vintners are put in the same position it is akin to the old gasoline wars when I was a kid…and that is not good for the owner.
  • Your other options are to sell to an internet company, and an extremely popular one now is wtso.com (wine till sold out). They manage the offerings so they are up less than an hour but that wine discussed above might have to go for $29.95! But what did the winery have to sell to them for? Another popular option is to sell it to the Chinese. You might even get or exceed your own retail price and that could be the difference between success and failure.
  • Lastly, in ever wine region I go to in the U.S. more and more wineries are springing up. The prices have to be high enough to pay the mortgage, unless you are one of those billionaire buyers discussed above. Sadly, I see some rough times ahead for the industry which increases with the big box stores, especially Total Wine. They are also a threat to supermarkets with wine sections, liquor stores, and boutique wine shops. Now add to this the internet sellers and the price pressure, although they would like to see it go higher, has to, IMHO, decline and it doesn’t make me happy to say that as I believe they need to be compensated for their investment and labor.

It gives me no pleasure to write this having made so many friends in all areas of the wine business, but if you find a wine you like…and I don’t mean Two-Buck Chuck…support them. I, no longer buy any wine from big companies…the last was when Mondavi sold out to Constellation Brands…and the same goes for beer where my favorite was Stella Artois, but now is part of the merged conglomerate SABMiller/AmBev. Strictly craft brews for me from now on. It doesn’t matter one iota but if more and more people take a stand there is still hope.

Even winemakers need a little love…show it to them.

TB

 

 

Vol. 2. No.24…TB’s new, improved rating system for wines!

In 1972, TB graduated from college and taken a job at Western Bancorp (later First Interstate Bancorp and now part of Well Fargo), in the Investment Department where he and his boss and mentor, F. Alden Damon, managed the bond portfolios of the 11 smaller banks. Those were largely comprised of municipal bonds, so he learned to distrust Moody’s and S&P bond ratings as they were higher for similar credits on the East Coast than west of the Mississippi.

Deciding to go back to school to work on a Master’s, at night, he had a finance class that required a term paper. He submitted one on “A New System for Rating Municipal Bonds”. The prof questioned him on it and said if you pursue it don’t expect a good grade, because Moody’s and S&P already do that. Really? Frustrated but determined to continue with the project he worked on it, drawing on some research of a predecessor at WBC. Focusing on New York City, TB showed how that rating should have been much lower than the ‘A’ it carried, for many reasons including demographics, amount of debt service, and several other factors. Figuring he would probably get a ‘B’ or even a ‘C+’, he didn’t put his heart into it. In other words an adequate job but not a stellar one, thanks Dr. Dunn!

When the papers were graded, mine had an ‘A1/A+’ on it…huh??? Furthermore, he told the class it was the best he had received and even read it to the class. What caused his change of mind? NYC’s problems were finally coming out and it was on its way towards the biggest municipal bankruptcy in U.S. history! What had the rating agencies done? Lowered it to ‘Baa/BBB)’. In other words, using ‘my’ rating system would have predicted dire if not drastic possibilities, while the agencies glossed over it.

What is the point? Well, besides prof’s needing to encourage new thought, it is that all ratings are not created equal. Nothing is more true than subjective tasting of wine.

Consider the Judgment of Paris tasting the showed the quality of California wines was on a par with French wines. Quel horror! Even then on the second pass when they reversed the order there was some differentiation but generally close, except for the French judge who called it a travesty. They were using a system similar to the UC Davis 20-point system mentioned in the previous post. Imagine if they had been using the Parker (or similar) 100-point system, where 50 is the base and after all elements, 25 points are subjective – that’s 1/4 of the total and 50% of the scoring area! Gimme a break!

Parker defends his system but adds (as mentioned in that post):

“Scores, however, do not reveal the important facts about a wine. The written commentary that accompanies the ratings is a better source of information regarding the wine’s style and personality, its relative quality vis-à-vis its peers, and its value and aging potential than any score could ever indicate.”  Robert M. Parker

Got that? They are meaningless comparing one rating with another on the same time, even under the same variables but when they are at different times independently, they are absolutely worthless!

Now drag that across, not the current three bond rating agencies, but perhaps two or three dozen wine critics with varying palettes and desired flavors (not to mention potential conflicts of interest by who they may represent – TB is shocked at this! Shocked!)

As mentioned in the prior blog, we have rating escalation (where no one tries to get you to buy a wine with a rating less than 90! So we have a lot of 91-93 ratings, fewer but still many 94-95 ratings and fewer still with 95-98 and 99-100 ratings. But even Parker has increased the number of 98-100 ratings since 1982 when he rated just two bordeaux wines that high. Here is a link to  a list of his 100-point scoring wines…you decide:  http://www.wine-searcher.com/robertparker.lml

So TB got to thinking. IF there is compression, we need a bigger scale. Here is TB’s proposal of a 1,000 point rating system!!! Consider that there would them be 100 categories of wines – 100 times the number in the current system. Imagine telling your friend that you own a 1,000 point wine and his is only a 980. What plonk that must be!

Here is a comparison to all three scales:

20-point       100-point                                         1,000 point

Appearance                            0-2                    0-5                                                     0-50

Color                                        0-2                     <             included in Appearance        >

Aroma/Bouquet                    0-2                    0-15                                                    0-150

Volatile Acidity                     0-2                     n/a

Total Acidity                          0-2                     n/a

Sweetness (sugar)               0-1                      n/a

Flavor (!)                                 0-1                    0-20                                                 0-200

Astringency                           0-1                      n/a

General Quality*                  0-2                    0-10                                                    0-100

*Only subjective category in UCDavis system; In 100-point it also included potential for further evolution and improvement – aging.

TB’s system has the advantage of making broader distinctions between a 94-95 point wine…TEN whole points…wow! Hopefully, you see this charade for what it is, because IF that became the norm, it would be even more impressive to say “my wine is a 950, yours is just a 940…peon!” But here is the incredible thing: even more price escalation! Because those ten points might now mean $50 more cost to the consumer! Yet it still might not impress if your guests tastes weren’t aligned with the raters.

UC Davis

17-20  Wines of outstanding character having no defects

13-16   Standard wines with neither outstanding character or defect

9-12     Wines of commercial acceptability with noticeable defects

5-8       Wines below commercial acceptability

Since Robert Parker’s was the first, here is his rating meanings:

  • 96-100 — Extraordinary; a classic wine of its variety
  • 90-95 — Outstanding; exceptional complexity and character
  • 80-89 — Barely above average to very good; wine with various degrees of flavor
  • 70-79 — Average; little distinction beyond being soundly made
  • 60-69 — Below average; drinkable, but containing noticeable deficiencies
  • 50-59 — Poor; unacceptable, not recommended

Here is a link that show the minor differences in various 100-point systems. if the same person was using any of the systems they should not vary by more than a point or two.  http://www.wine.com/v6/aboutwine/wineratings.aspx?ArticleTypeId=2

Now to throw a monkey-wrench into the works, here is a personal story: in 1976, TB moved to Reno, Nevada on a job transfer. We met lots of people but they only liked beer (guys) and wine coolers (girls). One day, one of them asked if I could teach them about wine. Having brought dozens of bottles with me in the car and wondering how they held up TB said he would do it, with one caveat: they would have to work. How so? They would have to score the wines using the UCDavis system which was the only one at the time. At first they balked, but reluctantly agreed. There were eight wines in the tasting, and it was amazing how close their scores were when they had to evaluate the variables of the wine. As a ringer however, TB inserted a bottle of Gallo Hearty Burgundy at the end. Bingo! That one took best overall.

So what did we learn? That differences in preferences can be overcome by paying attention to everything that comprises a wine…to hell with the critics. This is especially true when a winemaker can take his wine to a lab in Napa, Bordeaux, or other places and be told what they need to do to get a 90 rating from Parker. That is the problem with ‘Parkerization’. Question: do you want to live in a world where all the wine tastes the same? Not TB!

As they were leaving, they asked TB to arrange a trip down to Napa Valley. It was agreed but as they were leaving one friend came up quietly and said that his uncle owned a small vineyard there and we could probably visit it. Oh sure, no problem the then-wine snob, TB said. Only when we got down there did we find out that his uncle was Joe Heitz! His wines were the most coveted in California at the time. We spent a lovely Sunday on their deck drinking Riesling with sausages from the Sonoma Cheese Factory (there was none in Napa at the time!). Then Joe and Alice took us on a tour of the winery culminating with a tasting of their wines, including the 1974 Martha’s Vineyard Cab. TB loved it so much he bought a case at $25 a bottle…most expensive wine I had bought at the time! It was so good, however that whenever we had someone over we had a bottle…until there was just one left. Never drank it and finally sold it at auction for $800, more than recovering my cost of the entire case (also sold a bottle of 1992 Screaming Eagle, it’s first vintage made by Heidi Peterson Barrett, for $1,200 – a Jeroboam sold at the Napa Valley Wine Auction for $500,000, the highest price ever for that auction – along with many 1982 Bordeaux I bought on Parker’s recommendation but didn’t personally care for as did some of my friends who also bought futures. That was the vintage that ‘established’ Parker as the reigning guru, Robert Finnegan, had panned it, and was over-ruled by Parker.

What does TB drink today? Mostly wines in the $20-$40 range except for wines that are bought from the winemakers who have the passion I want. Not big estates, not corporate owned entities. Wines that taste different from year to year and are produced for the pleasure of the owner/winemaker…not some critic.

Another lengthy one but hope you found it interesting…and useful.

TB