ENTHUSIAST'S CORNER April 2003

The Silver Lining in the Oversupply Issue



The Silver Lining in the Oversupply Issue

A dramatic increase in responsible wine consumption over the next few years could be one result of the industry's current woes.

A tennis ball and a football are both subject to the laws of physics, but one will bounce in a predictable fashion and the other won't. Likewise, the wine industry must obey the same law of supply and demand that governs other manufacturing sectors, but don't expect the equations to look at all similar.

Unlike manufactured goods that are produced in whatever quantity the market will bear, wine is an agricultural product and is at the mercy of climatic changes and, to some extent, fashion. So wine executives and winemakers are expected to look down the road five or ten years and predict not only the weather and its effect on vintage quality and quantity, but the whims of wine drinkers as well—and not just in their own backyards. They must have 20-20 global vision.

The sheer impossibility of predicting and thus controlling these factors makes it likely that there will be occasional, even cyclical, oversupplies of wine and grapes. That's the situation facing the wine industry in 2003. Is this "grape glut" and oversupply of wine just part of another cycle that will shake out according to traditional business models? Or is this a new industry in a new global economy, with new players affecting the severity and duration?

In this issue, we take a close look at the global beverage alcohol industries. Roger Voss speaks to the top executives at three of the most important players in the wine and spirits industry—Pernod Ricard, Allied Domecq and Diageo. I think you'll find their views on these issues, and others affecting the future of the wine industry, fascinating and instructive. Also this month, Steve Heimoff reports on the grape glut as it affects California winemakers and grapegrowers, and the strategies they are employing to maximize profits in an unforgiving market. One strategy, obviously, is to lower prices. To that end, Steve, like me, has been following the saga of Charles Shaw's "Two-Buck Chuck" with keen interest.

"Two Buck Chuck" is the nickname the trade has given to bottles being distributed by Bronco Wines that have been sold in certain West Coast supermarkets for a remarkable $1.99 each. Even more remarkable, a million cases a month have been sold of this value-priced wine. It vividly illustrates how a global wine oversupply creates downward pressure on price. People of all incomes now have an incredible array of quality choices. "Two-Buck Chuck" has broken a price barrier and—let's hope—is introducing tens of thousands of consumers to the pleasure of wine drinking. While "Chuck" won't single-handedly deplete the enormous oversupply of wine grapes on the market, this type of creative marketing will, in the long term, create the sort of wine consciousness which has been sorely lacking in America.

We can't really define America as a "wine-drinking nation" when 10 percent of the people drink 90% of the wine. Wine is a prime example of an immature industry with enormous potential for growth. I believe the current oversupply of wine, with the resultant affordability of quality wines, while putting short-term pressure on wine companies' profits, will serve to increase awareness of wine and expand consumption in the long run.

This is a crucial moment in the history of wine drinking in America. There is positive pressure for change. The winners will be not only the American consumer, who will receive better wine for a fair price, but the long-term health of the American wine industry. From the marketers with their ad schedules to the winemakers in their tasting rooms, they are being forced to creatively focus attention on educating new consumers about the unique, healthful advantages of enjoying a delicious glass of wine with meals—and why their product is better than another.

That's the way the ball bounces: short-term pain for long-term gain. I'm convinced that the beneficial effects of gaining new customers will be felt for many years to come.

Cheers!

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