Everything Is Bullshit: The Greatest Scams on Earth Revealed (6 page)

5.

IS WINE BULLSHIT?

M
any
oenophiles consider Château
Lafite
Rothschild
Bordeaux the world’s greatest wine. In the 17th century, both the British prime
minister and King Louis XV drank it regularly. In 1855, when Napoleon
instructed French wine experts to classify France’s Bordeaux wines,
Lafite
Rothschild earned a top spot as a Premier Cru, a
rank it maintains to this day.

Thomas Jefferson ranked among its admirers. In 1985, a 1787
bottle of
Lafite
Bordeaux that Jefferson supposedly
owned sold at auction for a record $156,000. Chateau
Lafite
Rothschild released their most recent Bordeaux for 420 euros a bottle. Older
bottles command prices higher than $1,000.

Wine experts discuss
Lafite
as if
tasting an ever-changing Impressionist painting. “The wine still has a dark
ruby/purple color and an extraordinarily youthful nose of graphite, black
currants, sweet,
unsmoked
cigar tobacco, and
flowers,” influential American wine critic Robert Parker wrote on the 2000
Lafite
. “I originally predicted that it would first reach
maturity in 2011, but I would push that back by 5-7 years now.”

The most highly imported wine in America, in contrast, is Yellow
Tail. An Australian wine known best for its colorful labels featuring a
kangaroo, it sells for around $7 a bottle. The winery produces 12 million cases
a year, and one theory for its successful conquest of the American wine market
in the early 2000s is that it created a simple, sweet wine that appealed to the
85% of Americans who don’t really like wine. With price tags that differ by
several orders of magnitude,
Lafite
Bordeaux and
budget wines like Yellow Tail inhabit different worlds.

Despite these differences, it’s unclear whether anyone can tell
the difference between a $2,000
Lafite
Bordeaux and a
$3 table wine. In fact, many wine economists consider the matter settled. Blind
tastings and academic studies robustly show that neither amateur consumers nor
expert judges can consistently differentiate between fine wines and cheap
wines, nor identify the flavors within them. But if
a $10,
$100, and $1,000 bottle of wine all taste
roughly the same in a blind
taste test, how do you explain their different price tags?

How We
Produce 23 Billion Liters of Wine

Wine
is simply fermented grape juice, but its production is a finicky process.
Differences in the production of bottom and top-shelf wines parallel the gap
between how Burger King and an upscale restaurant make their burgers.

Asked about the keys to winemaking, the proprietor of
Domaine
Dujac
, which makes
an expensive
French Burgundy, responded, “The soil, the
soil, and the soil.” In fertile soil, grapes fill with water that dilutes the
flavor. Only grapes grown on rocky, challenging land stay flavorful.
Characteristics of the soil also impact taste, as do the climate and
topography. The French use the term “
terroir
” to
express how these characteristics flavor wine.

Lafite
treats
viniculture as art. Its soil of gravel, sand, and limestone in the Medoc region
of France results in low yields but flavorful grapes. The winery tries various
combinations of grapes in pursuit of the best possible vintage. Only grapes
grown in its best soil are bottled as premier cru (first growth) Bordeaux. The
rest are bottled as a “second growth” that sells for a fraction of the price.
Total production is under 100,000 cases a year, on-site coopers make wooden
barrels specially suited to imparting flavor, and staff light candles in the
tasting area before wine is sampled. Although not every wine benefits from
extensive aging,
Lafite
Bordeaux ages for a decade or
more before maturing into complex flavors.

Charles Shaw wine — nicknamed “Two-Buck Chuck” because it
first sold at Trader Joe’s supermarkets for $1.99 — inhabits the other
pole of the wine market. The makers, the Bronco Wine Company, grow grapes in
California’s Central Valley. The soil is considered too fertile to produce
flavorful grapes, but produces high yields.

The process is an economy of scale par excellence. Once picked,
grapes are processed and bottled in “a high-speed bottling plant capable of
churning out 18 million cases of wine a year, double the annual production of
all the rest of Napa Valley.” Bronco also buys surplus wine from other
California vineyards at bargain prices.

Owner Frank
Franzia
doesn’t bother
with notions of
terroir
. All the wine is blended together,
regardless of its origin. In 2003, Bronco processed 300,000 tons of grapes to
make 20 million cases of wine, of which a quarter are Charles Shaw wines. Asked
how he sells wine for the same price as a bottle of water,
Franzia
responded, “They’re overcharging for the water. Don’t you get it?"

Wineries fall in a continuum between the artisanal and
industrial poles represented by these two wineries. But there is not a neat
correlation between size and industrial practices, on one hand, and price and
perceived prestige on the other. A tiny winery refuses to use artificial
fertilizers and pesticides may sell its wine for $10-$20.

Nor does every bottle of wine sell under the label of the winery
where its grapes were grown. Every year, wineries make more wine than they can
sell. Wineries produced 26.38 billion liters of wine in 2010, but the world
consumed only 23.21 billion liters. Wine merchants called
negociants
buy some of this surplus to sell under their own name and label. Cameron
Hughes, an American
negociant
,
sells
roughly 400,000 cases of wine a year at prices ranging from $10 to $60 a
bottle. In addition, giant labels like Charles Shaw and Yellow Tail, despite
having their own vineyards, mostly buy and blend other wineries’ grapes. For
some wineries, selling to
negociants
or the Bronco
Wine Company is a shameful necessity. Other wineries, especially smaller ones
focused on the winemaking process, are happy to have someone do the sales work.

Just four countries, Italy, France, the United States, and Spain,
produce 58% of the world’s wine; they also consume 40% of it. The market for
fine wines, however, is more globalized; Chateau
Lafite
Rothschild exported 75% of its premier cru in 2008.

Pricing
Wine

While
the Bronco Wine Company and
Lafite
Rothschild produce
wine in very different ways, that disparity alone cannot explain the huge
variation in wine prices. But it is helpful. According to Troy Carter, founder
of Motorcycle Wineries in San Francisco, wine consists of two distinct markets:
one is industrial, efficient, and cheap; the other is romantic and expensive.

Cheap, industrial wine constitutes the majority of what the
world drinks. Among Americans who drink wine regularly, only 12% spend $30 or
more on a bottle each month. The U.S. imports more Yellow Tail — the
budget Australian wine — each year than the total number of bottles
imported from France. Carter estimates that 90% of wine by volume is under $10
a bottle, and he says that in this part of the market, production and
distribution costs determine prices.

Troy Carter describes the distribution process for a wine that
sells for about $30 — the process that applies to the cheap wine market
and much of the romantic wine industry — as follows. Wine is widely
dispersed to stores, supermarkets, restaurants, and private collectors by wine
merchants and distributors, as wineries avoid these responsibilities.
Distributors buy cases of wine from the maker at $15 per bottle. They then sell
it to restaurants and stores for $20.

Restaurants’ markups vary, but stores consistently sell it for
$29. Vacationers in Napa Valley will pay $30 to buy the bottle directly from
the winery. It is something of a standard that bottles cost one dollar less at
stores than at wineries. Supermarket chains like Costco, which is the largest
provider of wine in the U.S., sell the bottle for around $22 — just above
wholesale prices.

For cheaper wines, the economics of distribution work similarly.
When you buy a $7 bottle of Yellow Tail
chardonnay, that
somehow covers the production cost, taxes, import duties, and various markups.

The boundaries are fuzzy, but as you look at the pricing of
mid-range wines that cost from $10 to $70, the rules are less and less
straightforward. That wholesale price, and the price consumers ultimately pay,
become disentangled from marginal production costs. At $50, Carter tells us,
pricing is nearly independent of production costs.

In this range, brands can dramatically affect price. The same
wine in two differently branded bottles can have very different costs, as shown
by the prices offered by
negociants
such as Cameron
Hughes. In the Washington Post, wine columnist Dave McIntyre observes:

“Hughes signs confidentiality agreements that preserve a
winery’s anonymity. After all, a producer of a $40 Napa Valley cabernet
sauvignon doesn’t want his customers to know they can get a nearly identical
wine from Hughes for $25. Yet the winery might need to move out surplus
inventory, generate cash flow or make full use of capacity, a win-win-win
situation for the producers, consumers and Hughes.”

The region of origin also significantly impacts price. Wines
from Napa, for example, are 61% more expensive than other Californian wines.
This partly reflects differences in quality, as Napa’s soil and many of its
winemakers are well regarded. It also speaks to the branding power of certain
regions. There is a reason that Napa winemakers cry foul when Frank
Franzia
labels Charles Shaw as Napa wine (his offices are
in Napa), even though the grapes come from the Central Valley.

Reviews by prominent wine critics can also send the price of a
wine soaring. As an Atlantic article said of Robert Parker, the world’s most
influential wine critic who reviews fine wine but also wines as inexpensive as
$20:

“A positive review and a score over 90, especially for a wine
that is produced in small quantities, can ignite speculation that sends the
price rocketing and clears the wine out of the stores.”

A mix of production and distribution costs, brand reputation,
pricing strategies, and quality and critical reception determine prices of
mid-range wines. There
are
some pricing anomalies, but
for the most part, the market for wines in the $4 to $70 range operate like a
typical consumer market. When Yellow Tail’s kangaroo logo helped it dominate
the U.S. wine market, it led to an avalanche of wines
labelled
with colorful critters. That may clash with the refined image of wine, but it’s
the type of standard beverage industry fare that actually governs the majority
of wine sold by volume.

Fine
wines
, however, are
a different beast
. Almost entirely cachet, their prices rise
and fall with little connection to quality.

Speculating
In Human Snobbery

One
night, this author found himself at a dinner party at a billionaire’s house.
After the meal, the host gave a tour of his wine cellar. “The best part of
having a wine cellar,” he confided, “is that you can drink thousands of dollars
of wine for free.”

He accomplished this by taking advantage of how wines’ price and
quality increase as they age. Until the turn of the
millenium
,
oenophiles wealthy enough to sit on thousand dollar cases of wine dabbled in
wine “investing,” usually with a glass of Bordeaux in hand. As Darius
Sanai
described it in GQ:

“For centuries, investing in wine was fairly straight forward.
You would buy as many cases of classed-growth claret en
primeur
(as futures) as your budget allowed, watch their value double over the next few
years, take delivery of half of them, and sell the remainder to recoup your
initial investment. Your capital was returned to you, and your interest was
carried in all the fine wine you would need to entertain your guests over a
lifetime.”

If an investment went bad, you simply threw a very expensive
dinner party.

In the mid 2000s, Chinese nouveau riche entered the fine wine
market. China’s economic growth produced over one million millionaires who
sought out Western status symbols. London filled with third-world businessmen
who drove
Maseratis
and shopped at Harrods. New York
City received the same treatment, as did luxury brands like Gucci. And fine
wine.

The demand for premium wine skyrocketed. Prices saw exponential
growth from 2008-2010. Analyses from the London International Vintners Exchange
(
Liv
Ex), a company that tracks fine wine prices like
the Dow, show the value of premium wines very gradually increasing in price
from 1999 to 2006, then shooting up to over four times the price by 2011.