Wednesday, February 15, 2012

Booze Will Be Cheaper, Right ? Part 2

So, last time I laid out the generalities of why the Costco-written and voter-approved Initiative 1183 will actually result in higher liquor prices here in my home state of Washington. Let's get specific:  as an example, let's say a distributor in WA buys a 750ml bottle of vodka from its producer or importer and along with the transportation costs of getting the bottle to WA has a cost of $10.  Let's see what you pay when you take that bottle through the check-out lane. 

Original acquisition cost for the distributor              $10.00

Distributor's Profit Margin (25%)                            +$2.50
License Fees & Shortfall Cover (13.9%)                  +$1.39
Total Margin & License Fee (38.9%)                       +$3.89

Distributor Price to the Retailer                                $13.89

Retailer Profit Margin (30%)                                  +$4.17
Retailer's License Fee (26.6%)                              +$3.70
Total Retailer Margin & License Fee Cover (56.6%)   +$7.86

Shelf Price                                                                    $21.75

Other Mandatory State Taxes Collected at Checkout:

20.5% State Tax                                                 +$4.46
Per Liter Tax $3.77                                              +$2.83

Total 750ML Price to Consumer                                $29.04

So, $10 becomes nearly $30.  And, most premium liquors do not start out at $10; they are much more.  I expect we'll see a lot of Absolut drinkers become Smirnoff buyers and Smirnoff buyers become Popov buyers.  Trading down will be the norm as consumers adjust to an unexpected reality.

Sunday, January 15, 2012

1183 - Booze Will Be Cheaper, Right?

When Washington State voters approved Initiative 1183 last November, many of them were convinced the days of Washington having among the highest prices for liquor in the nation were a thing of the past.  Sorry, no.  The state taxes on liquor are not going down or away.  And, to overcome a major objection to its previous effort to privatize liquor sales in the state, Costco inserted language in 1183 that guaranteed the state would not lose money from the closure of its state liquor stores.  Here's how it works:
March 31, 2013– Distributor license fees must equal $150 million to the State of WA on this date.
 Any shortfall in that figure is allocated among distributors based on their share of 2012 spirits sales.
Expected shortfall:  $100 million.  Distributors are already figuring this into their wholesale liquor pricing.
Distributors pay 10% of gross profits on spirits to the state for  1st two years, 5% thereafter.
Retailers pay 17% of gross profits on liquor sales to the state.
$35.67 taxes on each $100 Wholesale cost - Spirits

Does this look like a formula for lower priced liquor in Washington State?

Friday, December 30, 2011

Sea Change - Wine in Washington State - 1183 in 2012

I like New Year's; it's the starting-over aspect that appeals to me. We Americans love 2nd acts, reinventing ourselves, and leaving the past behind.  How else to explain Newt Gingrich?  How else to explain the resurrection of this blog after a 2-year hiatus?  

As we are about to enter 2012, Washington state, where I live, is about to start its 2nd act with wine and liquor.  In November, voters approved Initiative 1183.  Here's what they thought they were getting:
  • Liquor would now be available in chain grocery stores and Costco. 
  • Liquor would be cheaper.
But 1183 had much more in it.  Costco wrote this initiative as it had 1100 which failed last year.  A few years earlier, Costco had sued the state of WA to overturn its wine distribution system.  On appeal, Costco lost most of its suit. So, with both initiatives, ostensibly only about privatizing liquor sales, Costco inserted language that got it all it had failed to get in its suit.  To wit:
  • Quantity discounts allowed
  • Uniform pricing on wine repealed
  • Direct buying from suppliers allowed
  • Central warehousing allowed
Not so bad, huh?  Sounds okay.  But, I voted no.  And, here's why:  I am all for letting grocery stores, warehouse clubs, and wine shops sell liquor.  But this law, in effect now since Dec. 8, was written by Costco for Costco, and tilted the scale way in favor of Big Business at the expense of small business.   Let me explain how it will affect the wine business here in WA:

  • Quantity discounts allowed.  This effectively threw out a system where everyone--small wine shop, restaurant, chain grocery, and club store--paid the same price for one bottle or 100 cases.  This level playing field meant that Costco's only advantage was that their membership fees allowed them to work on a much lower profit margin (about 14% or lower) than the chain grocery stores (25-30%) or wine shops (30-35%). Now, which of these four types of retailers is going to have the wherewithal to buy in quantity? Rhetorical question #1.
  • Uniform pricing on wine repealed.  Distributors are already planning  pricing for different channels of business, e.g. restaurants may pay a different price than the independent retailer next door.  And, there's nothing in 1183 that prevents a distributor from selling the same wine at a different price to the restaurateur who's a pain in the butt vs. the Joe Good Guy next door.
  • Direct buying from suppliers allowed.  Full disclosure here, I work for an importer of wines from around the world.  We sell our wines to distributors whose job it is to place them in the market.  We do not, nor do other suppliers, have the manpower or trucks to sell directly to the thousands of stores and restaurants in any given area.  So, who's going to be able to buy directly from suppliers?  Rhetorical question #2.  A company with its own trucking system and a Central warehouse.  (Central warehousing of wine by a chain such as Costco or Safeway was illegal in WA until 1183.)
  • Direct buying from suppliers allowed.  2nd point here: A supplier selling directly to Costco or other chains is going to accomplish three things:  

    1. He's going to piss-off his distributor, not a good business move.  
    2. He's going to alienate the rest of the market, meaning that wine he sold directly is probably going to be discontinued everywhere but that chain. 
    3. He's going to make his bonus, once.

  • 10,000 square-foot minimum store size to sell spirits. This was one of two major changes between the Costco initiative that failed in 2010 and 1183. Designed to overcome the objection that mini-marts and gas stations would be able to sell spirits and would be more likely to violate the law by selling to teenagers, this section nonetheless contributed to the overall tilt of this law in favor of big business.  Only one wine shop in all of Washington meets this minimum (Wine World in Seattle).
  • Shelf Space Squeeze.  So, where's all this liquor going to go in Trader Joe's, Safeway, QFC, Fred Meyer, or Central Market?  Rhetorical question #3.  In the wine department, of course.  Notice all that extra room there?  Rhetorical question #4.  Wine choices will be fewer in these chains, and yet, ironically, because they can buy in quantity or directly from suppliers, they'll have the best prices.    
So, predictions are many about the unintended consequences of 1183, but the prediction not in doubt and put in its most pleasant way is that Washington will become a chain store-driven wine market with fewer choices but lower prices. Costco has told stock market analysts that it intends to take on the liquor laws in Oregon and Idaho next and go nationwide from there.

(Two lawsuits have been filed to overturn 1183.  Both contend that 1183 violates WA state law that prohibits an initiative from addressing multiple subjects.)

**Next blog:  Why 1183 will not result in lower liquor prices in WA state.

Monday, October 19, 2009

The Halo's Crooked

Okay, first off let me apologize to my loyal readers (yes, I'm hoping it's plural) for the indefensible gap between blog postings. On Sept. 1, just a few days after my last post, I began a new job with a steep learning curve and some pretty significant demands on my time. And, while I'm not any less opinionated then before, my time has been occupied getting up to speed with my new employer, its distributors and its wines.

This is only the fourth time in my 25 years in the wine business that I've joined a new company, so I'm a little preoccupied.

Meantime, on a long drive from a trade tasting this week, I resumed thinking about the blog and a subject I've touched on briefly in the past. It's the halo effect, something that a lot of MBA's in the wine world use as an excuse to expand a winery's offering far beyond its original fame and reputation.

What got me to thinking about this is a new book from a veteran business journalist. Entitled Trade-Off: Why Some Things Catch On, and Others Don't, its primary theme is that products of any kind can appeal to our sense of quality or our sense of convenience but not to both. The author is Kevin Maney, former USA Today and Fortune magazine columnist. I'm a fan of his, too. He's also a musician and plays a Fender Stratocaster, as do I, and wrote and recorded a song entitled "Wouldn't Want to Be Bill Gates." Hell, yeah.

Quality implies snob appeal; convenience implies ease of purchase and low cost. Think Nieman-Marcus vs. Wal*Mart. Maney call this the "fidelity swap." He defines it as the ever-present tension between fidelity (the quality of a consumer’s experience) and convenience (the ease of getting and paying for a product).

Many companies not just in the wine business have a corporate strategy to grow a brand beyond its original market. "It looks tempting," Maney writes, "Some companies believe they can get there, and life will be beautiful. But as it turns out, any company or product that attempts to capture both is likely to fail."

In the wine world many of those companies are owned by conglomerates and staffed by MBA's with little or no experience in wine. They see brand equity in the same way some homeowners viewed their property's equity until recently--just something to spend. Well, as many homeowners have found the value of their homes decline, they've found equity to be elusive. So, is it far-fetched to believe that these conglomerates who have sucked the equity out of established wineries won't or aren't meeting the same fate?

Robert Mondavi (the brand not the man), Beaulieu Vineyards (BV), Beringer, Sterling, Penfolds, Ravenswood, and even the storied 1st Growth Bordeaux Chateau Mouton Rothschild (Mouton Cadet, et al) have spent their equity with cheap, convenient imitations of their fidelity brands. We in the business like to think that these massive line extensions answer consumer demand, that the consumer knows full well the difference between Robert Mondavi Napa Valley wines and Robert Mondavi Private Selection, between Beringer Private Reserve Chardonnay and Beringer Founder's Estate Chardonnay, between Penfolds Bin 389 Cabernet-Shiraz and Penfolds Koonunga Hill Shiraz-Cabernet.

They don't.

A very earnest gentleman came up to me at the aforementioned trade tasting and after tasting an Argentinean Malbec at my table proceeded to tell me that the upswing in Malbec's popularity was due to the fact that Malbec is a dry wine with no sugar, thereby making it a safe beverage for diabetics. I'm not a doctor, nor do I play one in this blog, but come on.

The point here is that this is the kind of misinformation common out there, folks. The average consumer likes to drink wine and doesn't care to research it much. We're kidding ourselves if we think most wine drinkers care to delineate the differences in these line-extended brands. So buy the cheap imitation. It's convenient, costs less, and is easy to understand. Convenience, yes; fidelity, no.

Thursday, August 13, 2009

Malbec's Turn In the Spotlight

As stodgy and tradition-bound as the wine world sometimes seems, it is subject to the whims of changing tastes, as much as popular music, movies, and fashion. Unlike those, however, wine is agricultural based. It's the luxury liner in a harbor full of speed boats--can't be turned easily.

As a beer industry executive said recently, "The trouble with wine is you can only make it once a year."

Worse yet, grapes come from vines planted in the ground, often expensive ground, and the silly things want to produce the same type of grapes every year. So when tastes change rapidly, the wine world lags behind and then usually overreacts.

Merlot shot up in popularity in the 1990's, ostensibly as the softer version of Cabernet Sauvignon. This was part of a sea-change resulting from a 60 Minutes broadcast entitled "The French Paradox," which examined how the French were able to eat a diet much richer than ours yet have less heart disease. The difference Morley Safer intoned: "Red wine."

Overnight, the U.S. went from consuming about 60% white wine to 40% red wine to the reverse of that. Consumption of red wine increased 44% in one year. Red table wine blends were suddenly in short supply. Merlots were allocated and in very short supply. Prices shot up. Supply and demand.

Supply caught up with Demand (and beat its skinny little ass into the ground) as growers and wineries reacted by planting significant new acreage of Merlot, often in places not suitable for it, and by grafting over vines of then less popular varietals. As a result, within a decade, we had a lake of watery, one-dimensional, dull Merlot from the world over; its nadir cemented in the 2004 film Sideways when Paul Giamatti's character Miles Raymond screams, "No, if anyone orders Merlot, I'm leaving."

The movie also spurred an intense interest in Pinot Noir, Miles' passion. And, off we went again. Even inexpensive Pinot was suddenly in short supply. More plantings, more Pinot, please.

Now, it's Argentina's turn in our spotlight with, ta-da, Malbec. Easy to pronounce Malbec (Mall-bec), though, is not Merlot. Merlot's popularity had to do with smoothness and softness. Malbec has a spicy, earthy richness to it with enough character and complexity to be appealing in its bang-for-the-buck ratio.

Originally one of the five varieties used in Bordeaux (not so much now), Malbec is the primary grape of Cahors in southwestern France. It has been widely planted in California, Washington, Oregon, and several other states, used mostly as a blending grape. But, in the last decade plantings in California have increased sevenfold. Here, we go again.

Although there are pricier and cheaper versions available from Argentina, the sweet spot seems to be around $10. The big wine companies, as usual, are doing the Me-too dance, and Malbecs are suddenly everywhere.

History, as it is want to do, repeats itself. Substitute the word Australia for Argentina, Shiraz for Malbec and this could be a decade ago or so. Australia, with few exceptions, was not able to establish its premier grape beyond the $10 bottle, nor delineate its regional differences in the minds and tastes of U.S. consumers. It fell out of fashion.

I fear the same fate for Argentina and Malbec. But in the meantime, here are some pretty girls in the latest styles, the hit of this year's party:

Altos Las Hormigas Malbec, Mendoza, 2007, $9.99
Although clocking in at 14.5% alcohol (usually a warning to me to stay away), this wine has terrific balance. Everything seems in place. Spicy notes with blackberryish, plummy fruit and a white pepper note. Easy to like.
Imported in Washington by Elliott Bay Distributors, in Oregon by Domaine Selections.

Trapiche Oak Cask Malbec, Mendoza, 2007, $9.99
There's a velvety texture to this one with blackberries and plums predominate in the fruit. Not as overtly fruity as the Altos, but seems more complex with black pepper, smoke, and a touch of vanilla. Long finish. Both are amazing values.
Imported by Frederick Wildman & Sons.
Prices quoted are average retail. Prices may vary.

Tuesday, July 14, 2009

The 3 R's of Summer Wine Drinking

June in Seattle is not a summer month. Junuary is what we call it. It's wet and cool and indistinguishable from January here. Usually. But not this year. We had a record-tying 29 days without rain, and July has continued a mostly dry, hot summer. Summer usually begins here on July 5th, so most years, this is when I begin to lighten up on the food and drink more white wines than red.

But with this run of hot weather, I've been in my "clean, crisp, and refreshing" mode of drinking for some time. And, I've discovered a basic rule that has kept me happy and smiling in hot temps:

Riesling, Rose, Repeat--the three R's. Repeat after me--Riesling, Rose, Repeat.

Now, I'm not talking about insipid sweet, mass-produced rieslings, the kind that Washington wineries used to churn out for cash flow. No, I'm talking about clean, crisp, dry riesling. And, I'm not talking about anything labeled "White Zinfandel" or "White Merlot" or "White Tuiti-Fruity." These wines are clearly not white; they're pink and ashamed of it. No, I'm talking about dry rose wines here, proud and manly enough to call themselves rose.

Here are a few of my finds. All are widely distributed in western Washington and Oregon. Distributors for both states and national importers are listed below.

Triennes Rose, 2008, Provence, France. This wine comes from an estate in the south of France owned since the 1980's by two of Burgundy's titans--Jacques Seysses, founder of Domaine Dujac, and Aubert de Villaine, co-owner of Domaine Romanee Conti. This wine is a blend of Cinsault, Syrah, and Merlot, and possesses more body than most roses but with a sense of freshness and lightness still intact. Flavors of strawberries, cherry, and watermelon with just enough crisp acidity on the finish to ask for seconds. Under $15. Imported by The Sorting Table, Napa, CA. Distributed in WA by Cavatappi Distribuzione, Ltd., Seattle; in OR by Galaxy Wine Company, Portland.

Paul Jaboulet "Parallele 45" Cotes du Rhone Rose, 2008, France. 50% Grenache, 40% Cinsault, and 10% Syrah, this beauty shows a ripe fullness of fruit on the palate, with crisp, citrusy notes underneath. Freshness here as well and hints of strawberries, too, but the bracing acidity and richness make for a wonderful companion to grilled vegetables and burgers or just al fresco relaxation. Around $10. Imported by Frederick Wildman & Sons, New York. Distributed in WA & OR by The Odom Corporation.

Chateau Ste. Michelle Eroica Riesling,2007, Washington. Ste. Michelle has a dramatic lineup of Rieslings, most of which are great summer wines, but this is the crown jewel. Made in a joint partnership with Germany's Dr. Loosen, this wine delivers citrus flavors of orange and lime with a crisp acidity that along with the added complexity of mineral notes combine to elevate this to the level of elegance. Under $24. Distributed in WA & OR by Young's Columbia Distributing.

Penfolds Thomas Hyland Riesling, Adelaide, 2008, Australia. (Full disclosure: I previously worked for the company that owns Penfolds.) This wine joined the enormous Penfolds line up just a couple of years ago, but is fast becoming the critic's darling. Produced from fruit grown in the cool-climate Adelaide Hills, the Hyland Riesling is crisp and clean with a lemon and lime citrus streak and mineral notes that expand on the lengthy finish. Under $13. Imported by Foster's Wine Estates, Napa, CA. Distributed in WA & OR by Young's Columbia Distributing.

Notice that the roses are both 2008. The fresher, the better--so always look for the most recent vintage and drink up, don't age. Rieslings, on the other hand, can age magnificently and gain body and complexity. One of the most memorable wines in my life was a 20-year-old German riesling, an Auslese (late harvest), on the dry side, served blind at the German Wine Academy. Not one of the Brits and Americans there, me included, could identify the wine. It was fabulously rich, oily, complex, big-bodied, and exquisite. I can still taste it.

Thursday, July 2, 2009

Good Times, Bad Times

We Americans hold certain truths to be self-evident, that among these is this: When times are tough, we drink more. A new Gallup poll released this week shows otherwise.

The poll found that 64% of Americans regularly consume alcoholic beverages, a figure that has remained fairly steady for the last decade. Moreover, the number who consume eight or more drinks per week is at 14%, also unchanged in the last 10 years.

Also, the poll found virtually no change in our drinking habits in the past year when the recession deepened.

So, the self-evident truth here is that in good times and bad, we continue drinking--not more, not less. Besides, while it may be easy to tell the really bad times, the good times are most often only viewable through the rose-colored rear view mirror. I, for one, don't drink to forget the bad times or celebrate the good times (well, okay, yes, I do and with Champagne to boot--both for good and bad times).

I drink wine because I like the incredible array of flavors, the way it enhances the food I'm eating, the conviviality, the frivolity, the fun, and the relaxation. And, occasionally, with a great wine, the WOW factor. And, more often, with just a good wine, the YUM factor.

I can't remember ever opening a bottle of wine because the economic times were unsettled (they always are), the international situation was in crisis (it always is), or because life was uncertain, unfair, or unfathomable (yes, it is). For me, and many of you I hope, drinking wine is divorced from current events. It's the wine, not the economy.