The good news: The Financial Times reported yesterday that a French finance ministry official said the two sides had agreed to a “ceasefire” until the end of the year. He told the newspaper that no tariffs would come into force before then and talks would continue on digital taxation.
Where we are with the 25 percent European wine tariff, and where we may be going
A few thoughts after talking to a couple of dozen people – importers, distributors, retailers, and producers – about the 25 percent European wine tariff (and most asked not to be named, citing the nature of the dispute):
• How long will the tariffs last? Almost all I talked to were pessimistic – one official at an important New York importer said he was an optimist, which meant 12 to 18 months. “And that’s because I’m an optimist,” he said. “Others are telling me the tariffs will be here forever, because who lowers taxes once they’re imposed?” In this, he told me, the tariffs will almost certainly change the way Americans buy wine. This was echoed by an employee of one of the biggest distributors in the country and a prestigious Dallas retailer. If $15 French and Spanish wine suddenly costs $20, who will buy it? They’ll just switch to another $15 wine
• Will anyone “win” this part of the U.S.-E.U. trade war? If winning is scoring political points, then the Trump Administration is having a victory party. And I have no doubt Jackson Family Wines is celebrating, as short sighted as that might be. But if winning is solving a problem, then no one has won and almost no one will win. As a former newspaper colleague of mine, a respected South Carolina political writer, said recently: “Tariffs are a mug’s game.” These were imposed as punishment for something that happened 14 years ago, and it’s difficult to see how taxing British wine will solve an aircraft parts dispute.
• When will prices go up? The tariff only affects wine imported after Oct. 18, so if it’s already in the country, we’re probably safe. The New York importer said his company will raise prices on wine brought in after Oct. 18 in the next 30 to 60 days. On the other hand, a Dallas retailer told me his very large chain is trying to figure out a way to absorb some of the increase for less expensive wines, since it doesn’t want to see them priced out of existence. He said large retailers, thanks to economies of scale, might be able to work around some of the the tariff’s effects.
• What’s the Wine Curmudgeon doing? Trying not to panic. The blog’s reason for being is cheap wine, and much of the world’s most interesting cheap wine comes from France and Spain. Price that out of reach, and I don’t have much to write about, do I? I can still count on Italy, and I’ve spent considerable time in local retailers looking for wine from countries not affected by the tariff. The good news is that I stumbled on a $10 Chilean pinot noir and a $10 South African white blend. The bad news? That doesn’t make 52 wines of the week. And availability is almost certainly going to become even more uneven than it is now, and we know how uneven it is now.
That’s the impression I got after spending yesterday on the phone, talking to retailers and importers in the wake of the U.S. announcement that it would tax wine imported from France, Germany, Spain, and Great Britain an additional one-quarter of its value. It’s part of a laundry list of goods and services, including olive oil and airplane parts, that are being taxed in retaliation for illegal European aid to the Airbus plane manufacturer.
I asked James Galtieri, whose Seaview Imports brings in 85,000 cases a year, 40 percent from France and Spain, if we’ll see any $10 French or Spanish wine left in the U.S. if the tariff takes effect. “Probably not,” he said. A Dallas-area retailer told me the same thing: “There’s no way anyone can afford to sell those wines for $10 if they cost 25 percent more because of the tariff.”
In fact, Galtieri said the tariff could even take down $15 to $18 wine. “Those are the kinds that could fall out of bed completely. Yes, a $1 or $2 prince increase on a $15 wine doesn’t sound like much. But $15 is the sweet spot, and people don’t want to pay more than that. So they’ll likely buy something else, and those wines will disappear from the shelf.”
A Spanish importer, one of the best in the world, was even more blunt. “I might as well close my doors,” he said.
One bright spot?
Italian wine avoided the new tariff. But Italian producers could take advantage of the situation to raise prices and still remain competitive. Will that happen?
The other bright spot? There’s still some confusion about how the tariffs will be applied. A spokesman for the U.S. Trade Representative, which announced the new duties, said: “For questions on how the increased tariff rate is applied to specific products, we recommend contacting U.S. Customs and Border Protection, which will be implementing the tariffs.”
And a spokeswoman for a custom broker in Houston, which guides companies through the import maze, said Thursday that it had not been officially notified of the tariffs, including how they would be calculated. So there is a chance, however slim, that 25 percent may not mean 25 percent.
Finally, several people told me there is a chance, also however slim, that the U.S. and the EU could negotiate a settlement to the Airbus dispute that doesn’t include the wine tariffs. That may be our best bet to save $10 European wine.
This week’s wine news: The booze business has discovered it doesn’t want tariffs, either, plus wine writing’s unique demographics and expensive wine doesn’t guarantee quality
• No tariffs, please: The Wine Curmudgeon is not the only one who understands that tariffs are a mug’s game. Most of the booze business’ leading trade groups, including the Wine Institute, have asked the federal government to drop plans to tax European Union products. The story, from Shanken News Daily, is a bit convoluted, but the gist is that even people who never agree about anything else agree about this: “Entry level, everyday products are going to be affected just as much as high-end imported products,” said the CEO of the group that represents wine and spirits wholesalers.
• An exclusive club: Tom Natan, writing on the First Vine blog, discovers one of the wine business’ underlying truths, “the uniform racial makeup of the wine writing world. … at least the part I experience at meetings and conferences — seems to be populated almost exclusively by White people like me.” He parses some intriguing numbers, including that almost one-quarter of U.S. business owners and bosses are women, but that only 4 percent of wine and spirits businesses are owned or run by women. And only one-fifth of those 4 percent are women of color. This is in marked contrast to food writing, he writes, which is much more diverse. Natan looks for reasons why this is true, but misses something else: Does this lack of diversity explain why the wine business is so obsessed with expensive wines – the kind that are preferred by its older, wealthier demographics?
• Not so fast, expensive wine: Dan Berger, writing in the Santa Rosa Pres-Democrat (in the heart of wine country, no less), warns us that “wine buyers willingly accept being fed a diet of misinformation — or no information at all. They continue to buy wines based on marketers’ fictions, accepting lies or faux facts, and believing high prices indicate high quality.” And, just to be sure we understand, Berger asks: “Can you imagine buying a car without first gaining specific details about its specifications, and without taking a test-drive? How about buying furniture off the web that doesn’t give measurements or the material from which it was made?” But, and as been mentioned here many times, wine drinkers do that regularly, because we assume that wine is different than cars or furniture.
Real estate, not foreign tariffs, determines California wine prices
Consider two wines: Both white Rhone-style blends, both from respected wineries, both speaking to varietal character and terroir, both well-made and enjoyable. One costs $24; the other costs $12. So what’s the difference?
More than anything, that’s why California wine prices are as high as they are. The land – even in the less famous regions like Paso Robles – can be some of the most expensive in the world. Equally as important, a lot of vineyard land in Europe — even quality land — was paid for decades ago, so the price of a bottle may not include the cost of the loan to buy the land. In some parts of California, the cost of the mortgage is the difference between a $50 and $60 bottle of wine.
And the more demand for California wine that there is, the more money people will pay for California vineyards. And higher land prices in California mean more expensive grapes and more expensive grapes mean more expensive wine. It’s that simple.
That’s because all else is mostly equal: The cost of labor, the cost of the bottle, the cost of shipping, and it doesn’t matter whether you’re in Texas, California, or France. In fact, California might have a slight edge in some production costs, since it’s the center of the U.S. wine business. So, in the end, the price of the land in determines California wine prices.
Jackson Family, like other big California producers, likes high land prices. High prices make the company more valuable. So when it says it can’t afford to make $10 wine, it’s being honest – but it’s also crying crocodile tears. It has decided premiumization is the future of wine, and it doesn’t want to make $10 wine. Smaller producers, faced with the same land price constraints, aren’t nearly as sanguine. Many have told me they see their wines being squeezed out of the market by companies like Jackson Family, who can work on smaller profit margins on an $18 bottle and undercut the smaller producers.
In other words, Jackson Family Estates could do what E&J Gallo (Barefoot), The Wine Group (Franzia), and Bronco (Two-buck Chuck) do – use Central Valley grapes to make $10 wine. But it’s easier to ask for a tariff wall and punish U.S. wine drinkers. Which should demonstrate exactly where Jackson’s interests lie, and it’s not with the wine drinkers.
First, Barbara Banke, the chairwoman of Jackson Family Wines, told Wine Business Monthly in February: The wine business “seems tougher this year and it probably will be tougher next year. It doesn’t seem like it’s as easy as it was.”
Second, the suggested retail price for the company’s flagship product, Kendall-Jackson chardonnay, is about $17. But you can find it for $10 or $12 without too much trouble, which no doubt causes much consternation at company headquarters.
Is a pattern emerging here?
The Jackson Family proposal for taxing European wine has nothing to do with free trade, the so-called “level playing field,” or any other political rhetoric. It has to do with profit – Jackson doesn’t want to sell $10 wine, so it doesn’t want anyone else to sell it, either.
Which I completely understand. I don’t agree with it, but I understand it. So why hide the company’s true intentions behind complaints about unfair trade? Because who would agree to tax $10 European wine to protect one company’s profits? Hardly anyone who doesn’t work for that company.
Which brings us to the Wine Curmudgeon’s wine supply and demand primer. California’s role in the world wine market is important certainly, accounting for about 280 million cases a year. But it’s not as important as Californians like to think. The French, Spanish, and Italians combine for almost 1.8 billion cases a year, while the total production of Chile plus Argentina is some 11 percent higher than California’s.
So what makes anyone think that the so-called “level playing field” would change anything? The rest of the world already has plenty of wine of equal quality and that will probably still cost less, even without the offending tariffs and subsidies. Why would a European buy €15 or €20 California wine (assuming anyone in California could sell it for that little, given California’s pricing structure) when they could still buy €8 or €10 European wine in the supermarket?
And this assumes that California can somehow produce enough wine to export. Which, as I mentioned in the first post, it doesn’t. We drink almost all the wine made in the U.S. in the U.S., and that doesn’t look to change anytime soon. They’re pulling out vines in California, not planting new ones to sell cabernet sauvignon to France and sauvignon blanc to Chile.
So there may not be much demand in the rest of the world for California wine, even if there was enough supply to export it, tariffs or no. The Jackson Family proposal ignores those basics, because it doesn’t help their argument.
Fortunately for those of us who care about wine and not wine company profits, I’m here to make sure those basics aren’t ignored.
Rick Tigner, the CEO of Jackson Family Wines (home to the legendary Kendall Jackson chardonnay), told a wine industry meeting last week that California can no longer afford to produce cheap wine. Hence, the federal government should tax wine imports because “we need a better, higher pricing structure.” In other words, $10 European, Australian, New Zealand, and South American wine should cost as much as California wine — because, of course, California wine.
Yes, that was my reaction, too. Wine consumption is flat and young people don’t seem particularly interested in it. So the man who runs one of the most important wine companies in the country wants to make wine even more expensive? That makes tremendous economic sense, doesn’t it? Let’s price wine out of the reach of most consumers, and our business will be even more successful.
The story was so incredulous that I almost called the reporter who wrote it to ask him if something had happened during Tigner’s speech. Was Tigner struck by a bolt of lighting? Was there an invasion of body snatchers? Does he have one of those evil soap opera twins?
I wasn’t the only one who was dumbfounded. A European wine analyst told me she was surprised a leading wine company official would say something like that. A Napa wine marketer said it was just one more example of California arrogance — because, of course, California.
Tigner overlooked two things (besides the most basic laws of supply and demand):
First, 95 percent of U.S. consumers won’t pay more than $20 for a bottle of wine – perhaps my favorite wine statistic, courtesy of the Wine Market Council. So who is going to buy all the expensive wine that tariffs will give us?
Second, Tigner can complain that other countries tax California wine unfairly as much as he wants, but that’s irrelevant. U.S. wine exports measured by cases (mostly from California) are insignificant – barely more than 10 percent of what we produce each year. That’s because we drink almost all the wine made here, so there isn’t much left to sell to the French (assuming they would want it). In fact, U.S. wine exports are so trivial that two of our biggest markets are Nigeria and the Dominican Republic, countries not usually associated with wine culture.
So, no, taxing my $10 Gascon white blends, Spanish cava, and Italian red blends won’t save the California wine industry from itself. The only ones who can do that are part of the California wine industry, which tells us everything we need to know about how that will turn out.