Remy Charest has a wonderful piece on Natural Wine over at Palate Press. A must read for some much needed balance on the issue of what is and is not “natural”.

My take: Making a wine without sulfur is crazy if you want consistency in your product. I’m not speaking of vintage to vintage consistency, I’m talking about bottle to bottle consistency from the same vintage. For those who make wine without sulfur and do it well, more power to them.

Where I have a problem is when reviewers and importers deign to instruct producers on how wine should be made. Just as there are no atheists in the foxhole, there are no real non-interventionest winemakers when you are staring down the barrel of a lost vintage. Happily this is a fact that Remy’s article makes perfectly clear.

My suggestion to those writers who feel that any wine not produced in a “natural” way is worthy only of a flush down the nearest latrine, is to take the time to verify that the wines you enjoy are actually as natural as the producers claim. That means testing them at a lab for, at the very least, free SO2. If you were a curious writer you could do more. It would be incredibly useful if natural wine advocates were able to properly ascertain where the nuances they enjoy emanate from.

Perhaps elevated amounts of volitile acidity are what you find enjoyable. Or, maybe, it’s the sometimes sweet and fruity aroma of ethyl acetate. Some folks might like a little red apple and sherry mixed in with their juice in the form of acetaldehyde. Perhaps it’s a mixture of all of the above and more; a wild cocktail of wine bug aromas.

A little independent testing would reveal what it is specifically about the natural wines they drink and recommend that they find so appealing. Because, and this is my real point, the only difference between a wine made with the addition of SO2 and one without is the elevated presence of various compounds that, in high enough concentrations, are considered wine faults.

Cowardly Wineries

Chateau Ste. Michelle in Washington has decided to “stay neutral” on the controversial free market wine proposition I-1100 up for a vote in 2 weeks in Oregon. They happen to be the largest member of the Washington Wine Insititue, which is against the initiative for incomprehensible reasons. Incomprehensible, that is, based on their statements. Here’s their basic position:

If all the laws are crossed out,” Leonard said, “that would allow retailers to force wineries to pay for the best shelf space and for advertising and promotional materials. That will tip the scales against small wineries.”

Wineries currently face these same pressures via proxy from wholesalers. Producers are simply one relationship removed from doing anything about it. And that’s if they can even land a spot in a wholesaler’s catalogue. And that’s assuming that the wholesaler does anything at all to try and sell their wine.

My take: The only reason a winery would come out against a free and open market for wine is if they are cowards afraid to compete based on the talent of their people or the strength of their brand. If you are large, your relative strengths are going no where. Conversely, if you are a small producer in WA and I-1100 passed, your ability to make a dent in the market through your own efforts is limited only by your marketing ingenuity and brand equity.

The folks afraid to play the incentive game with all the cards on the table are dross that should be swept aside so that room for real entrepreneurs will emerge. Protectionism breeds incompetence, laziness, and cowardice. Harsh, but true.

Sadly I-1100 is polling at less than 50%, so it appears the meek will live to cower another day.

For the impatient, the reason is: taxes.

Read the whole post.

Look, folks. Every wine writer with any influence or connections has partaken of gourmet meals for free. Every wine writer with any influence or connections has been hosted, or limo’ed, or accommodated, by his or her hosts, to some degree, and at one time or another. I have, and so has each critic I’ve ever known — because over the years I’ve run into them at the same feasts, in the same hotels, at the same festivals whose entry fees were waived for members of the media. I don’t know Dr. Vino personally; perhaps he is that rare bird, a wine writer and critic who has never taken a dime from a winery or winery organization. If that is so, he must be independently wealthy, which few wine writers are.

In response I worte this comment. Looking at it after I hit submit, I was dismayed at some grammatical mis-steps, and missing words (my wife copy edits all my posts). Also it’s important enough that I wanted to reproduce my thoughts here on my blog.

Nice post Steve.

I fault no critic for taking free meals, free private jet rides, free admission and free lodging. I have no problem with reviewers tasting wines non-blind while on junkets and then scoring them. You folks have to eat after all, and you need a ride to get there. Why not do it in style?

While I don’t condemn Parker for what’s happened, I am extremely pleased at recent events.

Why? Because it has given me the perfect opportunity to convince key influencers to stop comparing themselves to the pseudo high standards set forth by Parker in the WA and in his books.

Citizen reviewers on Twitter, blogs, cellar tracker and vinfolio should all be viewing themselves as mini Kermit Lynchs, not mini Robert Parkers.

The same way that bloggers can post affiliate links to books that they review and earn a commission from Amazon, I believe that bloggers and others in social media should be able to post links for others to purchase the wines that they review and earn a set dollar commission.

Further, I believe those links should go straight to the winery’s website. Reviewers should acknowledge the fact that they are earning a commission. They should also be paid handsomely for it, because they are the channel of the future.

It’s transformational. Imagine social media links on multiple platforms all driving recommendations and reviews right to the source, to where the wine is made. All done transparently. All done ethically.

How? As you point out, credibility is earned and folks must take critics on their word. They won’t read you if they don’t trust you.

The same logic applies to citizen reviewers. And if they disclose that they are getting paid if you click a link after a good review, there can be no conflict of interest. Why? Because if their readers begin to sense that they are giving wines that they earn money from good reviews simply to earn a comission, they will stop clicking those links. They will stop trusting those reviews. No readership, no trust, no revenue.

The system is self policing. This disperse channel will coalesce, and it will be the most transformational event in wine since the repeal of prohibition.

These are exciting times. And we will have Parker, Jancis, and you Steve to thank for helping speed its arrival with your candor.

Agree? Disagree? This was not tongue in cheek stuff. I mean it. And while some conservative wineries may question the legality of affiliate links, I am firmly in the camp that believes that set cash commissions for affiliate sales though links does not endanger a winery’s license.

And as for the ethical questions: to use Heimoff’s term, it truly is a tempest in a tea cup.

This first graph (created in the wonderful Apple spreadsheet app, Numbers) shows the highest price per ton paid for each grape variety in California Sonoma County. Considering the high price of Napa Cabs, you’d expect the top prices to go toward Bordeaux varieties. Well, that’s not the case this year. Oops! Got a little ahead of myself there. The graph below represents only a subset of the data. Tony Correia, an expert on vineyard economics, called me on this one.

The top per ton price was indeed paid for Napa Cab: over $37,000 a ton. Doh! He speculates that it may be a Harlan buy. Thanks for the correction Tony! And check out this great piece on vineyard economics for Wines and Vines where Tony talks a bit about the realities of vineyard investment.

Ahem, moving along. The top spot for district 3 (Sonoma) goes to Pinot, with a top $/ton clocking in at a swarthy $11,464.00.

Nice work if you can get it.

The next of the top tier performers, all at 10K per ton, are the Bordeaux varieties: Cab Sauv, Cab Franc and Merlot. I suspect those prices were paid by Joseph Phelps or a similar producer that can command in excess of $100 a bottle. Those are followed by Syrah, Zinfandel (Turley?), and Petite Verdot.

Unfortunately, as you’ll see in the next graph, the average price per ton for Pinot is nowhere near the lofty heights shown above. So, in the off chance you were contemplating buying some property and planting a vineyard in CA, the numbers below should sober you up. Or perhaps not…

The trend line here is certainly promising. Average Pinot prices are up 13% year-over-year. Since land available for planting high quality fruit is pretty darn scarce, there’s every reason to believe that, at least at the upper end, growth will continue into the future.

Growth is slowing however. Prices for in ’06 rose at a rate of 17% year-over-year. Again I think this will affect the lower end more than the upper. This is certainly supported at least in part by the extremely high price at least one producer is willing to pay for a ton of pinot (see the first graph).

But you never know. Predicting the future is a fool’s game. Take a look at the price per ton for Nebbiolo:

Everything was going along swimmingly until this past year. Then, suddenly, prices fell off a freakin’ cliff. Look out below!

To be fair this is most likely a function of once miniscule supply finally meeting and/or exceeding demand. Still, these are the same forces we deal with in every market, so I wouldn’t discount it entirely.

Anyway, interesting data. All in all though, the future continues to look very bright for my beloved Pinot noir.

Recently Leo McCloskey was interviewed over at Appellation America by Alan Goldfarb. One of the more humorous moments from the interview, from my perspective at least, is when McCloskey tells Appellation America that appellations, AA’s reason for existing, are pretty much worthless to consumers as indicators of quality. The AVA smackdown follows.

“When you hear AVA, you just think — vanilla. It doesn’t have any color to it and depth. … The AVA won’t tell you where the highest-priced wines come from within the AVA because the producer of the lowest quality product in the AVA wants to cover up (that) fact. The true consumer information is always covered up by the AVA.”

McCloskey is a proponent of the European system: tightly (self) regulated genetic material and winemaking methods crafted specifically for individual wine growing regions. He argues that the wine industry basically sweeps their poor performers under the rug of appellation by refusing to self-regulate, and that this confuses consumers. He also advocates forming a list, ex ante, of the highest quality producers in the market.

Lots of Problems

There are numerous problems with this reasoning. The most glaring of which is the problem of determining quality in the first place.

Under McCloskey’s system, the high performers (those wineries that command high prices in the market) are considered “high quality”. Winners sell wine. This is evidence of quality. We need to celebrate winners and ruthlessly weed out the losers.

But more than any other industry, price and market success in the wine biz is driven by getting a high score from an elite group of perhaps 2 or 3 reviewers. They grade according to intensity. Coincidentally, that’s precisely the metric McClosky advocates using. So, effectively, quality is what Parker and Laube define it to be.

Interestingly, McCloskey acknowledges the problem with relying on experts to determine quality in the interview.

“It would be better to have a producer-based source because of the unreliability of the critics,” he says, surprisingly. “Critics’ ratings, of course, are subjective. About 30 percent of the products are misrated and this creates a risk to capital.

Hmm. And we are supposed to trust this kind of circular definition of quality to crown New World 1st Crus?

Our Industry Doesn’t Scale

But let’s leave that issue for now and talk about risks to capital. McCloskey levels the charge that the wine industry is too conservative. He claims that we subscribe to an incestuous and protectionist type of psudo-competition that focuses on “rising tide lifts all boats” tactics rather than a more transparent and customer-friendly system that rigorously enforces quality standards and weeds out low performing members.

I can’t argue with his analysis. Ours is an industry that tries to limit risk wherever possible. Like all farming endeavors, we have plenty of risk built into the ridiculously capital intense system already. Why add more?

But there is another factor at play as well, and it’s huge: Our industry doesn’t scale.

Example by way of a question: What is the pay off if we were to switch to the system McCloskey proposes?

The pay off is that there will be a newly minted cohort of winners who should always be able to sell their wine at prices many multiples higher than the vast majority of competitors. Consumers, in turn, will be confident that they are getting quality when they purchase these wines. I suppose McCloskey would argue that this would lead to higher sales for these wine winners – but oh, that’s right, wine doesn’t scale. Once a producer sells out, that’s all folks. There’s no good way to monetize unmet demand, otherwise Screaming Eagle wouldn’t be ramping up production (at the possible expense of quality) even as I type this. The only way for the winners to take advantage of their position will be to raise prices, and I’m not sure how that helps consumers.

This is a huge problem. It’s so huge in fact that I predict that we (the wine industry) will never, ever voluntarily enact the changes that McClosky is proposing. The current winners (who would simply be cast in bronze and stamped with “High Quality” under McCloskey’s plan) already sell out. They have nothing to gain by backing such a system, except maybe a nice ego boost.

And the current losers? Do you seriously think anyone who spent 8 million on their Yountville estate vineyard and winery wants to hear that they are no longer welcome in the Valley because their quality levels or chosen varietals don’t measure up? No, the rich owners of under-performing wineries will tell whomever asks that Leo can go pound sand, and to leave them the hell alone thankyouverymuch. This is America, after all.

Leo of course doesn’t have this problem. His business does scale. In fact, if Enologix became the clearinghouse for quality for all of Napa Valley he stands to do very well. That’s no reason not to judge his proposal on its own merits, but it is interesting to note nonetheless.

Unworkable Silliness

Unlike the core service offered at Enologix, which I feel relatively neutral towards, I may be judging this McCloskey idea too harshly. It may be that I took personal offense to his statement (in the YouTube video below) that sales success due to marketing is “undeserved” (Underserved?? Explain white zin, Yellow Tail and Stormhoek’s success to me then. Is it all undeserved? Or are they perhaps providing something of value to the market besides wine quality?). Maybe I’m insecure since a system like he proposes would make the already steep barriers to entry in the wine industry even steeper. Perhaps I’m just overreacting.

But I don’t think so. I think this is just plain ol’ unworkable silliness. I think Leo knows his idea won’t ever work. So is he just trying to be provocative?

If he is, I don’t mind at all. Being provocative is good marketing. I just hope he remembers that any business he gets from this latest PR campaign is “undeserved”.

Cheers to Leo for getting folks talking.

You can read the entire interview over at Appellation America.

Pretty interesting stuff.

The cost and effort that goes into producing a full-fledged compliance engine is extremely high – Inertia cites a figure of $500,000 – but once in place the variable costs of adding new users is pretty close to 0 (though there are compliance upkeep costs, hardware, etc). Kudos to Paul and everyone at Inertia for recognizing that and using their position in the market to benefit not just themselves, but every winery looking to ship out of state in the entire industry.

And how exactly will Inertia benefit from just giving away a $500,000 product? I can think of a few ways. Besides the goodwill and excellent PR they’ll generate from this service, each winery they’re able convince to give their system a try, assuming the experience is a good one, will be much more likely to enter into a relationship with them. And while it remains to be seen exactly how easy the system will be for non-Inertia software to interact with (it should launch later this fall), judging from their press release they’ve made the system open and readily accessible.

If they’re able to capture a large portion of the compliance market, and given that the service is free and open I don’t see why they won’t, Inertia will be the straw that stirs the drink for a growing and extremely important part of the wine business: direct to consumer. Having access to that aggregate data will be very valuable, and I’m sure there are plenty of interesting ways to leverage it. There is real power in free.

The bottom line is: In the future if you want to know about direct, you’ll go to Inertia.

In a recent presentation at Sonoma State’s Wine Entrepreneurship seminar, a representative from SVB shared some aggregate data with the class. Behold:

Data removed at the request of Silicon Valley Bank.

There are a couple of interesting things to note. The first is the oft-cited phenomenon that folks in the wine industry are prepared to accept a much lower return on investment than would seem rational given the risk and initial capital outlays. Clearly there is an emotional element that comes into play regarding lifestyle, the romance of farming or the glamourous nature of wine in general. Or perhaps it’s something else entirely. Like mass insanity. Or alcoholism.

The second thing to notice is that the 20-50K case segment appears at first glance to be the sweet spot in terms of size. The ROE (Return on Equity) is twice that of any other segment and is actually competitive with other, more rational investment vehicles. Also it looks like all the SG&A (Sales, General and Administrative expenses) effiecencies have already been squeezed out at this production level. The SG&A % actually rises for the larger wineries in the 50-120K case range.

But what to make of the 3-10K case segment? This will be Capozzi Winery’s production level, and it looks rather bleak. ROE of 2%? Bleh. Return on Assets of .8%? I just threw up in my mouth a little.

I think that the numbers are a bit misleading though. First of all, much of the reason for the poor return is probably due to the fact that owners, who had most likely not been taking a salary at lower levels of production, finally started seeing some real cash and decided to start paying themselves. Also looking at the fixed assets figure it is obvious that folks at this level either own their own wineries, vineyards, or both (like we will) which is both a marketing and quality advantage at the luxury level.

Finally looking at the average value of cases sold, it is only slightly down from the very high levels attained at the <3K case level. This means that folks in the 3-10K case segment are successfully marketing and selling direct, maintaining their high margins. This is not the case at the 20-50K level, where average value of cases sold drops 36%.

If the brands at the 3-10K case level reinvest profits (rather than raping the company) and aggressively pay down debt, eventually they will be able to capitalize on their vertical integration via Estate bottlings and increased quality without sacrificing margins. For a family that already owns vineyard land, this is an attractive segment to be in for the long run.

Or maybe I’m just insane.

The bummer for me is that a middle man will still get a cut for doing (I’ll go ahead and spoil the punch line of this post) basically nothing. Jeff at Good Grape wrote a post about this last night. Here’s the gist:

The upside to this program is you might think that this would be a threat to the three-tier distribution system, but in fact it’s a benefit. In many states, Inertia is partnering with a distributor to aid in the administration of the program and the response from distributors has been strong because they see the value in allowing small brands access to the market so they can grow, without the risk of them having to take on inventory.

In our model, the winery fulfills all sales direct and we call this the “virtual inventory model.� The distributor participates, ecommerce facilitates the transaction, the winery gets a sale and sends the product.
…
Eventually the winery might grow to the extent where they will need traditional distribution services and, oh, yeah, they would be in a position to have access to a distributor that has been a part of the ecosystem fostering a friendly introduction and, potentially, allowing those winery brands to take their sales to the next level with more “on the street� sales horsepower. We call this “brand incubation.� Wineries are developing and growing their brands.

It’s a win-win-win for everybody…

I hesitate to call it a real win-win. In fact, the contortions that Inertia had to go through to be able to even offer this service to their customers highlights exactly what is wrong with the state mandated three-tier system. What, exactly, are the wholesalers doing to deserve a cut of the sale of my wine under this scheme? I repeat: nothing. Nada. They are acting as a state sponsored clearing house that never even takes possession of the wine! How then are they fulfilling their mandate to “protect the children” ect. ect.

What this reinforces to me is that the wholesalers are happily in bed with state governments and that without the prodding of the judiciary they would be quite content to see the system remain in place in perpetuity. The government trusts the wholesalers to get them their taxes and, in turn, they protect the wholesaler’s backside by making Inertia and others come up with incredibly inefficient schemes such as this “virtual inventory model.”

Now, I want to be clear here. Inertia has done a great thing in opening up a market that was otherwise effectively closed to small wineries. I just think that Jeff, and soon I suspect Paul, will be putting the best face on this scheme so as not to scare off distributors. They are shoehorning “direct” into a place where few thought it would ever happen: New York. But we shouldn’t be disingenuous. The consumer is still paying more for a bottle of wine in New York via this system than they should have to. Wineries are still making less per bottle than they should have to. And for all this, neither the consumer nor the winery are receiving any benefit.

This, my friends, is the three tier system.

Well the Judgment of Sauternes, as it was dubbed, was held today and the results are in.

California wines won. Again.

While there appears to be a pattern emerging, it still isn’t evident to at least one of the French judges. Here’s what Xavier Planty had to say about the “surprising” results:

Xavier Planty of Chateau (sic) Guiraud, where the tasting was held, had one theory as to why California won yet again: ‘When tasting wines from your own area, the critical part of your brain is switched on, when tasting from another area, the pleasure part is switched on.‘

Wait…wasn’t the tasting blind? Yes, I believe it was. So then how in the name of François Frères did these judges know when to switch on and off their critical faculties?

But I sense I’m being uncouth and piling on. Let me repeat again the sentiment that should become gospel for wine lovers around the globe: France makes great wines, some of the best on earth, and California wines are their match. There should be nothing insulting in this statement, so lets just dispense with the blind tastings unless we’re going to let the Chileans and Argentinians join in on the fun as well. We’ve beaten this one about to death.

Here’s the final list ranked by preference. Notice where Screaming Eagle wound up? Right at the bottom, just below Chateaux Margeaux and Chateaux Haut Brion. So take heart my French brethren, not all is lost.

RESULTS IN FULL
(All 1995 Vintage)

1 Abreu (Madrona Ranch)
1 Beringer Private Reserve
3 Pahlmeyer Propriatory Red
3 Valandraud
5 Latour
5 Shafer Hillside Select
7 Arrowood Cabernet Sauvignon Special Reserve
7 Ausone
9 Leoville Les Cases
9 Phelps Insignia
11 Mouton Rothschild
12 Mondavi Reserve
13 Cheval Blanc
13 Palmer
15 Staglin Family Vineyard Cabernet
16 Trotonoy
17 Araujo
18 La Jota Anniversary Reserve
18 Le Bon Pasteur
20 Pride Reserve
21 Haut Condissas
22 Spring Mountain
23 Petrus
23 Rollan de By
25 Chateau Montelena
26 Mouton Rothschild
27 Monte Bello Ridge
28 Cheval Blanc
29 Dominus
30 Colgin
31 Margaux
32 Spotteswoode
33 Le Tertre Roteboeuf
34 Haut Brion
35 La Mission Haut Brion
36 Croix de Labrie
37 Screaming Eagle
38 Harlan Estate
39 Diamond Creek Volcanic Hill