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Prosecco Rosé – Here’s the scoop

By |2021-01-20T01:27:02+00:00January 20th, 2021|Trends|

We sure are having a crazy run on bubbles so far this week. How about you?

It is like being in the toilet paper business back in May of 2020.

What on earth is going on?!?  Here are today’s “water cooler theories” in Grapeland:

A) People prepping for Inauguration Day “day drinking” parties.
B) Pre-Valentine’s Day stockpiling
C) Excitement over the just landed wines from Italy’s new “Prosecco Rosé” DOC
D) Celebration for the arrival of these vaccines **we actually know people getting theirs this week, how fantastic is this news**
E) All of the above

Whatever the reason for this “froth surge,” Montelliana’s Prosecco Rosé “Meliora” has arrived – If you’d like to know more about this “new” Italian DOC, scroll on below for our quick scoop, and feel free to use this in your own email blasts,  newsletters, etc.

Q: When did this happen?

A: The first examples showed up stateside this month.

Q: Why wouldn’t Italy time this so that the appellation was launched in time for the US holiday season?

A: The appellation rules were written by government bureaucrats, what do you expect?

Q: Ok so what exactly is this thing you call Prosecco Rosé DOC?

A: Prosecco rosé is a blend of the region’s naive Glera grape (this is what makes up most “regular” Prosecco) and Pinot Noir (producers may add up to 15%).

Q: Wait….Pinot Noir in Prosecco?

A: Yes, this is the only red grape allowed in the DOC, and even still, it is only permitted when fermented without skins.

Q; Everything I keep seeing in market this week is very pale in color – Is color regulated by the DOC?

A: Yes – This is intentional – By definition the color will be very pale as the “no skin fermentation rule” prohibits a situation where producers are able to add “red wine” to the mix as is common in other sparkling wine appellations around the world including Champagne. No skin fermentation means minimal color influence. The thinking here by the creators of the DOC was to mimic the elegant look, feel, and to some extent flavor, of Provence rosé. This leaves a producer two ways to control final color – The percentage of Pinot Noir used in the final blend, and adjusting how long the Pinot Noir component is macerated on skins prior to fermentation.

Q: Why are all of these new Prosecco rose’s vintage dated?

A: This is part of the regulation – The idea here from the officials responsible for creating the DOC was for this to be a “premium” category. With the DOC being brand new (created out of thin air) this is also quite convenient as a starting point. This quirk will be annoying for all of us in the trade, as any rosé wine with a vintage comes with perceived (and mostly invalid) shelf-life “baggage” towards the “end” of a given vintage in market.

Q: Prices on the big names look higher than I would have expected – Will Prosecco rosé be more expensive than a producer’s equivalent workhorse non-vintage bottling? 

A: Yes – Most of these are running 2-4 price points higher thus far compared to the same producer’s flagship NV bottling. Why? Easy – The provenance is usually better in these “vintage” wines, Pinot Noir is much less prolific and more expensive to grow than Glera, for those without Pinot Noir vineyards of their own high demand and limited supply within the appellation boundaries mean high fruit costs, aging requirements are longer, and above all else the market seems happy to plonk down $15-$20 on high quality bubbles from this area.

Q: As is the case with “regular” Prosecco, are these wines carbonated using the “tank method” rather than the “Champagne method”?

A: Yes – The soft texture produced by injecting CO2 in tank results in the soft palate texture consumers associate with Prosecco. In technical terms Prosecco has less than half of the carbonation as Champagne – 45 PSI in the former versus 100 PSI in the latter. Not only does this mean softness but it also means less perceived acidity (think CO2 = Carbonic ACID).

Q: I heard that Prosecco rosé DOC is required to be aged twice as Prosecco DOC – Is this true?

A: Yes – Prosecco rosé is required to be aged for a minimum of 60 days, versus the required 30 days for “regular” Prosecco. This will result in a touch more complexity in finished wines due to autolysis (think crusty, yeasty, honey-ish flavors). We are happy about this – The extended aging requirement will make the world a 0.0000000000001% happier place?

Q: Some of the “big brand” examples seem a bit sweet, while the few “indie” examples I’ve tasted are nice and dry – Is sweetness regulated in this new DOC?

A: Yes – Producers are allowed to finish with as low a sugar level as they dare for “brut nature,” and can leave sugar levels as high as 17 g/L for a most commercial “extra dry” bottling. Our version from Montelliana falls somewhere in between, finishing at what we consider a perfect 9 g/L.

Q: Why is this DOC and not DOCG?

A: The appellation did not want to affect the already existing premium (mostly hillside, high rent zones) of Valdobbiadene, Asolo, and Conegliano, so these areas are off-limits for Prosecco rosé and will continue to function as ultra-premium DOCG appellations for traditional “white” Prosecco.

Q: Has there been any pushback from smaller, more “indie” houses on the creation of this appellation?

A: Yes – Some question the designation of Pinot Noir as the “red varietal” used, arguing that a red grape native to the region would make for a more authentic final wine. We tend to agree with this sentiment, but also understand the thinking of those who wrote the rules here, that Pinot Noir grows well in this area of Italy, is probably the best option in terms of pure “deliciousness factor,” and is also something that the public can understand/wrap their heads around.

Q: What next?

A: Go out there, explore the market, and buy some of this pink goodness for your favorite merchants!

Rhône Tariffs. Seriously?!?

By |2021-01-06T00:14:12+00:00January 5th, 2021|Trends|

As you may have heard, the Trump Administration sent our industry a New Year’s surprise in the way of new tariff categories. My WhatsApp has been blowing up with questions from producers and all of you clients, so here is a quick, apolitical look at what is going on:

Q: Who is imposing these new tariffs?

A: The United States Trade Representative (USTR), which operates as part of the Executive Branch of the US Government and lies under the jurisdiction of the President, in this case Donald Trump. Upon entering office, President Trump appointed Robert Lighthizer, an economic nationalist, to run this department, which has resulted in a frenzy of new tariffs and trade wars across many industries at a rate not seen since the 1800’s.

Q: What categories of wine do the new tariffs affect, and at what percent?

A: These tariffs (with few exceptions) affect all French and German wine that is over 14% alcohol, in all size formats, with the exception of Champagne and other traditional method sparkling wine. They are collected as a 25% tax to be paid by importers over invoiced ex-winery cost at the time of customs clearance in the US port of entry. They go live on January 12th (yes again this frustratingly includes wine already on the water which means negative margins on presold programs).

Q: Wait — Didn’t the Trump Administration already impose 25% tariffs on French wine in October of 2019, and aren’t we still paying those?

A: Yes, but the original tariffs were limited to wines that were 14% alcohol or lower, in size formats of 2L or smaller, meaning many global-warming-era white wines (many checked in at just above 14% in the past several vintages), and most red wines (reds are usually higher in alcohol) were exempt. In many cases producers made special high alcohol cuvees for the American market in order to avoid the new tariffs (think about all of those 14.1% alcohol Sancerres and Provence rose’s that popped up last year, many of which were shockingly balanced/nervy/delicious we might add…were they really all above 14%? We don’t have a way to measure alcohol in house but we have our doubts…).

Q: What about people shipping French wine over in bladders and bottling them in the USA to avoid tariffs – Does this end that whole loophole also?

A: These new tariffs cover ALL sizes, with the idea being that any bulk bottled wine produced using this route would be subject to tariff as well…Those who impose tariffs hate smart loopholes and generally squash them right around the time new businesses are set to capitalize on them (this is the reason we did not get into the bulk Chablis bottling game in Grapeland). ***I’ll add that we did just book some brilliant (already stateside) Macon Uchizy that Guillaume Touton bottled in New York State using this strategy.

Q: Why was the original alcohol level set at under 14%?

A: Our guess is as good as yours, the most likely explanation is that the persons writing the tariff schedule assumed that most European table wines were under 14%. We will present this without further comment, but think back to the Clemson Football Team’s McDonald’s dinner at the White House and you will understand our line of thinking.

Q: Why did the Trump Administration expand the scope of these tariffs to include 14%+ wine and larger sizes?

A: The short answer was that this was an easy/major subcategory that had not yet been slapped with tariffs…The long answer is that this is all part of the continuing US versus EU trade war pertaining to aircraft manufacturing subsidies – The WTO issued Europe’s reparation ruling this Fall, Europe set their tariff allowance figures using Covid-era revenue data, and the Trump Administration cried foul stating that Covid era revenue data is artificially low and therefore unfair. These new tariffs on 14%+ wine/larger size formats is the Trump Administration’s way of “shooting back” at Europe for the use of what they consider unfair revenue accounting practices when setting retaliatory tariffs.

Q: Why is Champagne not included?

A: Your guess is as good as ours, but our thinking is that the Trump Administration needs one more high profile tariff threat to dangle in front of France for use in retaliation to the ongoing digital services tax dispute.

Q: We heard that Europe wanted to end this trade war by agreeing to erase tariffs on both sides – Is this true?

A: Yes, although like anything, the real story is more complicated than that. From what we hear and read, the Trump Administration seems uninterested in such a resolution and plans to issue new (non-wine related) tariffs literally the day prior to Biden entering office. It is what one could call “turning the volume to 11 at the end of the night?” We will again simply reiterate our opinion that nobody wins in a trade war.

Q: Since the United States Trade Representative (USTR) operates as part of the Executive Branch, does this mean that their leadership will change and that “Tariff Man” Robert Lighthizer will be replaced this month with a new “Trade Czar” appointed by President Biden?

A: Yes – Exactly – President Biden has tapped Katherine Tai to replace Robert Lighthizer as the person leading the USTR. Robert Lighthizer will return to public-sector work as an attorney/partner at Skadden.

Q: Tell us more about Katherine Tai…

A: Ms. Tai is a candidate who both sides of the aisle are apparently very happy with – A native mandarin speaker, she is expected to keep a firm stance on Chinese trade matters, and expected to approach negotiations with our European allies in a more traditional “pre-Trump” manner.

Q: Does this mean that when Biden enters office in a few weeks, that the new Katherine Tai led USTR will sign these tariffs away?

A: No. We do not expect any changes until Summer at the earliest – Trade negotiations take time, the Trump Administration has famously blocked any transitions with Biden’s incoming trade team, which means a slower timetable still (This is a most unusual circumstance and means that Biden’s incoming USTR appointees will start with zero information regarding ongoing trade related negotiations). Even then, Biden continues to imply that he will not come out and make fast changes to Trump-era precedents. It is a shame also that Biden isn’t a bit more like Obama (or most other former Presidents) in his approach to the personal appreciation of all things wine – The fact that Biden himself doesn’t drink at all isn’t very helpful here!! Think if this all happened upon Jefferson taking office…we’d see a rollback within minutes!

Q: Ok, so in a nutshell what does this mean for the wine market?

A: It means continued pressure on French and German wineries to further lower export prices, which will certainly force many multi-generational family wineries to sell or close forever (this is an awful one two punch coupled with Covid). Most producers will lower their ex-winery costs by 10%-15%, expecting importers to lower their margins in cooperation. Regardless of such adjustments, 25% tariffs mean higher laid-in costs for importers and distributors, and they also mean a huge cash flow crunch on importers (tariffs are due at time of entry in port and not in 90 days as are the usual terms between importers and wineries). Coupled with increased freight rates due to Covid and a continual decline in the strength of the US Dollar against the Euro you can expect a 15%-25% cost increase in our industry on any previously non-tariffed French and German wines. This will be most dramatic in situations where the wine changes hands through multiple middlemen (i.e. wines handled by national importers and resold to distributors will suffer the most – You’ll start seeing some basic Cotes du Rhone from the large importers trading in the high teens at retail).

Q: What does this mean for wine I buy from Grape Expectations?

A: Like everyone else, we will pass on some of the increased costs that come our way out of all of this, but we expect our 2021 pricing on staple categories to sit at or below where most of the market was in 2020 on the same categories (i.e. our culty single-vineyard Gigondas this year will trade at the same price that most other people’s culty single-vineyard Gigondas traded at before these new tariffs).

Q: How is that possible?

A: We operate on a notoriously lean business model, and your collective embrace of our digital platforms (Flash offers via email, Brine offers via web, and SOMM offers via text message) during this past year has allowed us to double down on this leanness. While we always reiterate that nobody wins in a trade war, EVERYONE WINS when wine flows in/out of our warehouse in giant chunks within days (as opposed to the average industry inventory turns of several times per year).

Q: In summary, what is the takeaway then?

A: We will approach this new reality in the same way that we’ve dealt with any of the other curveballs that have come our way in our 45 years of sourcing and delivering wine to you (and there have been many!!) – We stay positive, and will continue with the creative approaches. We see these tariffs as one more challenge to overcome in our mission to bring you jaw-dropping value, with great content to boot, in all price ranges, from family wineries who make things we deem exceptional. We made it through nine months and counting of Covid, we made it through the first round of tariffs, and we will make it through this little bump. First up on the “you dared us” docket (and a deal we are negotiating today) is tariff-era sub-$30 retail top-flight Chateauneuf-du-Pape, so stay tuned. There is nothing more celebrated in Grapeland than the hard-won completion of a tough challenge.

Geek Time: The Trinity

By |2020-10-13T17:04:42+00:00October 13th, 2020|Trends|

What things look like when global demand, exchange rates. and tariffs cancel each other out.

August’s tariff news was something we will take as a positive, despite any media spin to the contrary. In case you’ve been in the dark, mid-August marked the deadline for the USTR’s mandatory 180 day review in which existing tariffs related to the Boeing/Airbus dispute could be shuffled and modified (in this case there were threats of up to 100% tariff on certain items including wine). In the end no changes were made to the current tariff schedule – Wine at 14% ABV or below from Spain, Germany, France, and the United Kingdom in 750ml or smaller packages will remain tariffed at 25%, and we have another 180 day window until this will become an issue again.

Does this mean status quo for us? Not really. Over the last year, 99% of the talk about the business side of wine importation/distribution has centered around tariffs, yet tariffs are only one piece of what we call the “trinity” that guides our decision making when purchasing wine for you, with the other two pieces being global category demand and the USD-EUR exchange rate. Through the lens of this “trinity” let’s have a quick look at where we are as we head into Fall of 2020.

TARIFFS

We’ve covered the tariff issue forward and backward and don’t see a need to revisit it on this page. USTR tariffs have been a burden on cash flow for everyone involved since they are due upon arrival of product in port, and these tariffs have resulted in some modest price increases (most of which we posted this Winter). Many predicted doom for popular tariff impacted categories, and exports of these categories to the USA are indeed way down, in some reports implying a decline as steep as 50%. While overall import volumes are down, we say this is mostly due to cautious purchasing on the part of importers – For many importers in our industry uncertainty and resistance to change meant temporary paralysis. What about us at Grape you ask? We for the most part chose not to discontinue items or slow down purchases on tariff impacted categories and have not seen huge drops in demand for tariff-impacted wines.

We did, however, increase our position on 3L bag-in-box due the fact that this size category was exempt regardless of ABV, and the unexpected COVID situation created a surprise boom in 3L bag-in-box sales. With neither COVID or the current tariff schedule going away for at least another six months, you’ll see us quadruple down on 3L bag-in-box both in terms of inventory and new options. With 3L bagin-box being a bit of an outlier, our overall take on the tariff situation is that the market will take care of any export sales slumps, and that many categories of tariff impacted wines have arrived and/or will arrive in market at or even below PRE-tariff retail pricing thanks to the other two factors in the “trinity” – Changes in global demand and current exchange rates. Does this sound implausible? Read on.

GLOBAL DEMAND

Four markets dominate the global volume needs when it comes to exports from the European Union – The US, the UK, Hong Kong, and China. Demand for European wine could not have started more poorly in 2020, with Hong Kong essentially closed due to civil unrest, importers in the US market putting shipments on indefinite hold due to tariff uncertainty, UK importers putting shipments on hold due to Brexit/tariff/exchange rate uncertainty, and China partially closing due to the emergence of COVID there in January. By March we added a what had developed into a global COVID pandemic to the mix (meaning close to zero on-premise trade in all countries), and wineries were looking at a most unthinkable situation in terms of export projections.

Wineries in most cases held existing pricing through the Spring, and by early Summer we started to see volume-based pricing that we never would have imagined in categories with high percentages of restaurant consumption (think Sancerre and Champagne). The deals we’ve been presented in these categories have been more mouthwatering than a flute of Orpale, but we were forced to hold off on any speculative purchases in fear that the Trump Administration would shuffle tariff categories between loading date and late summer product arrival here in the USA.

Now that we are temporarily clear of tariffs, it is time to play. How low have things dropped though? If you looked at average costs now versus the menu of ex-winery costs by category we posted online this winter, you’ll see many have dropped quite a bit. Our low cost basis for Sancerre Blanc at that point was 7,40 euros – We’ve been seeing offers in the low 6,00 euro range lately. Our low cost basis for NV Brut Champagne at that point was 11,40 euros – Producers are creeping towards 10,00 euros at this point and wild one-off offers for cash strapped producers will only increase with global Champagne exports trending at just 50% of the appellation’s calendar year 2020 expectation.

So … You’ll see us pull the trigger on many of the mouthwatering deals that have been presented to us over the last few months as producers look to create cash flow (and space) for the 2020 harvest. In short, we will enthusiastically book as many crazy deals as all of you, our wholesale customers, think you can sell.

EXCHANGE RATES

Wild pricing on all of your favorite European wine categories sounds exciting, but exchange rates have as much an impact on the market as global demand and tariffs. In recent months the US dollar has weakened against the Euro – It now sits at 1.18 and threatens to weaken further into v the 1.2’s or beyond. For reference we were as low as 1.08 this Winter and as high as 1.35 at this time six years ago. As a rough yardstick, you can assume that for every 0.1 worth of exchange rate change you’ll end up with a retail shelf price change of between 7-10% depending on base cost.

TYING THINGS TOGETHER

With the above in mind, as you can imagine there are a dizzying number of exchange rate/tariff/price-based demand scenarios we could run, and many of you are asking us how things realistically look for Fall/Winter of 2020 compared to where we’ve been since this time last year. Warm recent vintages and no tariff changes mean that most Sancerre (and most appellations on the “edge” of 14% ABV in normal years) are coming in at a tariff exempt 14%+ ABV, and we will assume a mid-Fall exchange rate of 1.2

Fall 2019
Sancerre at €7,40 cost
No tariff
$23 retail

Winter 2019
Sancerre at €7,40 cost
1.08 exchange rate
Subject to tariff
$28 retail

Spring 2020
Sancerre at €7,40 cost
1.08 exchange rate
No tariff due to high ABV
$23 retail

Summer 2020
Sancerre at €7,40 cost
1.20 exchange rate
No tariff due to high ABV
$25 retail

Fall 2020
Sancerre at €6,50 cost
1.20 exchange rate
No tariff due to high ABV
$23 retail

This means that the average winery discounted, warm vintage, tariff exempt value-tier Sancerre you purchase this October will probably retail around $23 – the same retail price as the Sancerre you purchased last September, before the wine world went crazy with the one-two punch of tariffs and COVID. As far as direct import deals go, we expect to offer some options to you at or slightly below $20 retail.

We suppose this is a long way of saying that despite all of the noise, your wines should be on average coming in at the same prices this Fall as they did last Fall before everything went “crazy.” This isn’t really all that exciting, so you’ll never see it written about in the mainstream, but we find it kind of interesting if not a bit of a pleasant/positive surprise during a year when we will take any and all good news we can dig up.

New Podcast Episode – Jean Claude Mas: “To produce wines that make you dream”

By |2020-08-11T17:07:10+00:00August 11th, 2020|Podcast|

To say Jean-Claude Mas is a busy man these days is an understatement. With 15 wineries and a continually evolving philosophy on all things life and wine he has much to talk about. John Griffin was recently able to track Jean-Claude down for the inside scoop on Chateau Lauriga, the Roussillon property so many of you are enjoying this summer. Their conversation is now live on our podcast, Grape Unfined/Unfiltered. To listen via Apple Podcasts click here, to listen via Spotify click here, or simply stream below.

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New Podcast Episode – “Winepeople” in Quarantine: Positive Takeaways from Around the World

By |2020-04-23T03:15:19+00:00April 23rd, 2020|Podcast|

We know you are receiving plenty of negative news out there every day from the media, and we thought we’d do something different with our podcast platform this month. We set up a virtual “record button” through an app called SpeakPipe and asked our producers to chime in with a quick update for all of you…advising what quarantine life looks like in their corners of the world, and more importantly, that they elaborate on some of the unexpected POSITIVE twists that have come out of this challenging and bizarre period in history.

Many interesting recordings have come out of this experiment, and this is the first episode in a series of three. Today we check in with Natalie Oliveros and Francois Colas of La Fiorita in Montalcino, Christian Seely of Quinta da Romaneira in the Douro, Jerrod Englefield of Misty Cove Wines in Marlborough, Charlotte Serve from Vignerons de Florensac in the Languedoc, and James Lindner of Langmeil Winery in Barossa.

Click here for the episode link on Spotify, or here for the link in Apple Podcasts

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Introducing GrapeWein 2020

By |2020-03-08T06:25:56+00:00March 3rd, 2020|News|

We were extremely sad to hear Prowein 2020 would be cancelled due to Coronavirus concerns. The mother of all wine trade shows, Prowein is impeccably organized, a ton of fun, and also our most productive commercial event of the year. We want to maintain the opportunity to connect you with our producers for crazy deals on volume commitments, and for this reason we are taking matters into our own hands – Introducing GrapeWein 2020.

We purchased three beautiful/kind-of-expensive Kandao 360 Meeting cameras, picked up three giant video screens, upgraded our Zoom subscription to platinum, and queued up DHL shipments on the same pre-release samples that producers would have shown at ProWein. Pencils have been sharpened on pricing, and the best part is that EVERYONE in our community has the opportunity to get in on this action! Meetings will take place at each of our three West Coast offices between March 16 and 27. We are kitting each space out with delicious food including gorgeous jamon from Iker Fernandez! Just for kicks we will be dressed unusually sharp. Click the signup link, pick your time slot, and select three producers you’d like to virtually meet with. The producers will chime in via video upon your arrival, wines will be tasted, and deals will be cut for Summer/Fall arrival.

Here is the signup link: https://calendly.com/grapewein-2020

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Tariff Fallout (hopefully this is our last tariff article ever!)

By |2020-02-27T07:40:15+00:00February 26th, 2020|Economics, France, Germany, Spain|

You’ve undoubtedly heard the news that we dodged two massively concerning tariff-related bullets this January and February. There remains a great deal of misinformation in the market about tariffs in general – Let’s take a few minutes to review United States Tariff policy, where things currently stand, and what we can expect moving forward.

Let’s give huge props to those in our industry who took the time to stand up to current and proposed tariffs between October 2019 and February 2020. An astonishing 25,624 public comments were logged on the USTR Large Commercial Aircraft Tariff docket, and 3,761 on the USTR French DST Tariff Docket. We believe that loud uproar made all the difference here, and if you were part of the noise, thank you. Individually we would like to thank Jon Bonne for his far-reaching guest post via CNN, Harmon Skurnik for his terrific contribution in The Washington Post, Marvin Shanken for his aggressive work in using his reach to generate consumer uproar, and the two dozen industry leaders who spoke on everyone’s behalf at the actual USTR hearing this January: Jeff Zacharia (National Association of Wine Retailers), Richard Blau (Sokolin), William Tomaszewski (Wine.com), Benjamin Aneff (Tribeca Wine Merchants), David Waldenberg (BNP Distributing), Peter Weygandt (Weygandt-Metzler), Michelle DeFeo (Laurent-Perrier U.S.), Annette Peters (Bourget Imports), James Federico (VINTUS), Barkley Stuart (Southern-Glazers), Jenny Lefcourt (Jenny & Francois Selections), Philip Burkhart (Latitude Wines), Eric Faber (Cutting Edge Selections), Timothy Gagnon (Selection Massale), Michael Daniels (Vintage 59), Mary Taylor (Mary Taylor Wine), Christy Franc (Copake Wine Works), David Bowler (David Bowler Wine), Edward Swain (Devenish Wines), Geoffroy Ducroux (Avant Garde), Lyle Fass (Fass Selections), and Eben Lillie (Chambers Street Wine). If you have yet to read Alder Yarrow’s account of the hearing you ought to. It is well-worth your time.

THE SECTION 301 INVESTIGATION

What is the deal with an American President imposing tariffs anyway? Didn’t our school textbooks consider this a duty of Congress? Responsibility for tariffs was placed in the hands of Congress in 1779 via Article I of the U.S. Constitution. This responsibility remained with Congress until the Cold War era, when several statutes were passed, which in effect moved the responsibility of tariff and trade enforcement to the Executive Branch. The rationale for these changes being that in a new Cold War-era, most trade disputes were more closely related to national security than to commerce.

The two tariff threats that stressed all of us out this December-February came way via “Section 301 Investigation.” What exactly is a Section 301 Investigation you ask? The United States Trade Act of 1974 authorized the President of the United States to impose tariffs on a country if the United States Trade Representative (USTR) found that an “act, policy, or practice of a foreign country is unreasonable or discriminatory and burdens or restricts United States commerce.” This practice was used moderately between 1974 and 1994 (123 total Section 301 investigations if we want to be precise). The practice almost completely disappeared after 1994 thanks to the creation of the World Trade Organization, which was created as a “better” (and most importantly multilateral) solution for all involved in the new, post-Cold War era. President Trump famously came to office with a “different” approach to established institutions, including an aggressive and unilateral take on trade negotiation, unlike anything we’ve seen in U.S. history. The President has brought the practice of the “Section 301 Tariff ” back from the dead, with his first bomb being the Section 301 investigation that sparked the well-documented economic mess that is the US-China Trade War.

This is not a political post and I’m trying to stick to the facts. Do a bit of reading, and you’ll find that almost all economists agree that Trump’s use of Section 301 tariffs have harmed all economies involved. When you lump together the various tariffs the Trump Administration has imposed during the last 24 months, The Tax Foundation’s “Tariff Tracker” cites a significant GDP loss, decreased average wages, and 394,000 lost jobs. The United States Treasury released similar findings this January stating that while the U.S. economy has remained healthy, this is “in spite” of destructive tariff-driven U.S. trade policy. With such results, we now have various groups of Senators and Representatives working to amend the current Cold War-era trade statues that give President Trump to execute tariffs and tariff threats at will. If some of these proposed changes go through we could see an increased role for Congress overall in tariff-related matters, limits to the types of threats a president can reference as a justification of tariff implementation, a time limitation on the duration of any President-determined tariff schedule, and possibly full shifting of the responsibility of tariff imposition from the President to other parties (Congress and/or the Secretary of Defense).

TWO DODGED BULLETS

We’ve avoided immediate catastrophe on two fronts so far this year. Let’s start with the proposed “Up to 100% Tariff ” on all French Sparkling Wine. This was a hardline negotiating tactic Trump used to talk Emmanuel Macron into suspending the retroactive Digital Services Tax France unilaterally imposed in 2019 for implementation on January 1, 2020. There are interesting storylines and theories as to Trump’s strategy there, we’ve covered those in prior posts, and the bottom line is that an agreement made at the World Economic Forum in Davos this January means that both sides have kicked the issue to the curb until January 2021. In the meantime, the Organisation for Economic Cooperation and Development (OECD) will attempt to create a multilateral long term framework for the taxation of digital services in all developed countries. We are not holding our breath on a full resolution from the OECD between now and next January, as the issue is extremely complicated. By definition, any digital taxes imposed by individual countries or by a comprehensive OECD policy will disproportionately affect the U.S. based companies who control most of the globe’s digital landscape (Google, Apple, Facebook, and Amazon). Yes, we can think of this January Macron/Trump outcome as a temporary “win”, but know that this whole DST issue is an ugly beast due to make a return in the near future.

On Valentine’s Day we dodged the second big bullet of 2020, which was a potential restructuring of the tariffs imposed on wines from France, Germany, Spain, and the United Kingdom as reparations for the WTO decision that determined these four countries unfairly subsidized Airbus at the expense of Boeing. The USTR’s Section 301 Investigation found that Airbus subsidies had continued since the original WTO ruling, and the fear was that tariffs would expand to additional categories (all European countries, all alcohol levels, and formats, and up to 100%). In the end the USTR made little change to the tariff categories initially set in October 2019, with the most notable difference being a 5% tariff increase on aircraft parts imported from E.U. countries. In theory no further changes will be made to this tariff schedule until mid-August, which means that we can order with minimal fear of arbitrary tariffs coming into play during the transport time of EU-USA container vessels, which was the nightmare situation that resulted in a widespread stoppage to most EU-USA wine import activity from December through mid-February.

LOOMING THREATS

While it is nice to have some predictability, two threats loom on the horizon. First is Italy’s Digital Services Tax – This 3% tax went into effect on January 1 2020, and Trump has publicly denounced it as “no bounissimo,” saying that by definition any tax on digital services targets U.S. firms (the majority of Italy’s Digital Services revenues come through Google, Apple, Facebook, and Amazon). Whether this will escalate into a similar standoff to the one we witnessed between Trump and Macron is anyone’s guess, although at this point, we will assume that things are safe until January 2021.

The more provocative threat relates to a potential trade war escalation that could occur when the WTO releases final reparation settlement numbers to the European Union this May/June as a result of the second Airbus/Boeing case. This is the exact opposite case that spurred the tariffs awarded to the U.S. – It will almost certainly award similar tariff permissions to the E.U., as the United States illegally subsidized Boeing in the same capacity that the European Union subsidized Airbus. Should Trump take offense to E.U.’s actions on these tariffs, we may see the escalation of a real titfor- tat trade war on par with the 2017-present China debacle. With an election cycle in progress and as of this week plummeting global stock markets, we expect that the likely May/June tariff permissions awarded to the E.U. will mean a late 2020 settlement between both sides and the elimination of all Boeing/Airbus tariffs by early 2021.

MARKET CONSEQUENCES THUS FAR

As we detailed earlier, our direct import model has kept pricing reasonable for most of what we import, with our retail prices remaining below the pre-tariff national average for most wines in question. For some details on this please see our initial post from the grapex.com blog. Products handled through third-party importers have been much more of a challenge, we’ve discontinued a few dozen due to unacceptable proposed post-tariff price levels, and this will continue to be an issue if tariffs drag on. We guess that folks who function solely in the “importer” trade will cut down on employees to establish a leaner margin model.

We’ve experienced a large amount of growth with customers looking for compressed margin solutions, and our post-tariff sales figures are significantly up versus the same period last year, especially so for our Washington, Oregon, and California 3PL arm.

Some of us predicted a spike in non-tariff categories – We have not experienced action on this front, probably due to the efficient direct pricing structure mentioned above, but also because there are few actual substitutes for the impacted categories – New Zealand Sauvignon Blanc does not replace Sancerre, Oregon Gamay is still overpriced versus tariffed Cru Beaujolais, and nothing from the New World seems to beat $10-$15 tariffed Sur Lie Muscadet as a mineral-driven oyster companion.

The biggest issue for us at Grape this far was our decision to suspend shipments from the time of the December 6th announcement of possible tariffs and the February 14 resolution. We now have a backlog of containers on the water, and you can expect some short inventory gaps in staples like O+T Sauvignon, Fevre Fevre Chablis, Bonnamy Rosé, and Bag in Box Lumieres Cotes du Rhone.

Overall most of you on the “buyer” side would agree that there has been an oversupply of SKU’s in market. Buyers will see a thinner selection in terms of availability in 2020/2021. Smaller importers and distributors will be foreced to close (more than a few will be unable to handle the cash flow burden of 25% tariffs, which are due upon arrival in port rather than at 90 or 120 day terms as is customary with actual invoices on imported wine). We expect surviving distributors to act similarly to us in discontinuing, for example, that $17 pre-tariff third-party-sourced Cahors, which is now $22 and just outside of an acceptable price range.

These unilateral tariffs amount to a tax on every layer of our trade. They are paid by French producers, who are almost universally giving their U.S. importers and distributors a 10% discount to help combat tariffs. They are paid by American importers/distributors, all of whom are sacrificing margin as well. They are paid by American consumers, who, despite the sacrifices of the channels mentioned above, end up spending on average $2-$4/bottle more for the same bottle of impacted wine than they did this Fall. As we’ve stated on this platform previously, here is to a timely resolution of these unusual and mutually destructive disputes.

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Two New Podcast Episodes – Cider and Chateauneuf!

By |2020-02-05T20:12:31+00:00January 31st, 2020|France, Pacific Northwest, Podcast|

Building a Northwest Cidery

Our own Stephen Buffington drove to Wenatchee last week to sit down with Seth Cohen, the founder of Archibald James Ciderworks. They touch on a variety of topics including the importance of the cider industry in preserving Washington State’s heirloom apple varietals, and the interesting process of building a artisanal cidery from scratch in the year 2019.

Click here for the episode link on Spotify or here for the episode link on Apple Podcasts.

Introducing Domaine La Bastide Saint Dominique

Come with us as a fly on the wall as we visit the always lovely Veronique and Eric Bonnet in Courthezon and taste through their current Chateauneuf-du-Pape releases. As you’ll hear we left the winery pretty excited, and booked a handful of pallets via air freight for arrival next week on the West Coast!! These wines will be available to you through via direct distribution in Washington State and Oregon (get ready for a crazy prearrival offer), and through our distributors partners in selected states. Contact us with any inquiries about availability.

Click here for the episode link on Spotify or here for the episode link on Apple Podcasts.

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Tariff Update

By |2019-12-19T02:17:10+00:00December 19th, 2019|Economics, France, Germany, Spain|

Collectively all of us are beginning to experience the impact of the first round of wine tariffs which were the Trump Administration’s reaction to the WTO’s Large Commercial Aircraft decision in mid-October. Last month I posted about this initial tariff in some detail, and with the announcement of two more upcoming tariff waves my phone is ringing off the hook – For this reason today seemed like a good time to break the current situation down for you.

 

This is not a political post, and without taking any political stance I’ll say this: Over the last 80 years it has become crystal clear to anyone with a basic understanding of economics and/or history that in almost all instances tariffs decrease long-term economic prosperity for all parties involved. They restrict our natural human instincts to cooperate, limiting our personal freedoms while in the process inviting opportunities for distortion and fraud. Tariffs are as un-American as martian space dust – This is a universal truth that people on all sides of the political spectrum will agree with.

Tariff Round One

As we all know the October tariffs (aka Large Commercial Aircraft Tariff Resolution Round One) only impacted a select group of wines – Still wines at 14% or below ABV from France, Spain, Germany, or the United Kingdom. Because the US Government only gave the our industry 11 days of notice, all major importers inevitably had millions of dollars of goods on the water during the time of announcement and this spelled cash flow devastation for many…Why the cash flow devastation you ask? These tariffs are due (and in most cases auto-deducted from bank accounts) upon the physical arrival of product in destination port. Were you an importer with four containers of wine on the water on October 17th? Let’s assume each container contained $100,000 worth of wine? Congratulations you now instantly and unexpectedly owe the United States Government $100,000 (a 25% tariff on the value of each container means $25,000 times 4 which means $100,000). This “four container’ scenario is pretty mild. Most mid-sized importers/distributors in our industry had much higher volume than this on the water at the time of announcement. I did not get into the aforementioned cash flow angle when originally covering this topic, but at this point I’d say it is the most disastrous implication of the whole mess.

Cash, credit, and insurance…not the most exciting of topics, but essential in this discussion. Most European wineries rely on one of two credit insurance companies to cover their receivable risk, and these companies proactively dictate the amount of receivable debt a winery can hold for a given US importer/distributor. What happens if/when these credit insurance companies refuse to cover receivables for US importer/distributors? We’d end up in a situation where all business is prepaid, with the extra strain of a tariff bill due upon port destination. This is untenable and would mean a stop to most EU-US wine commerce. All is still “green light mode” with the major credit insurance companies, but my colleagues in London tell me they know of uninsured wineries who are now starting to refuse the release of new orders to US importer/distributors fearing that October’s tariff surprise will end up bankrupting their US importer/distributor customers due to the implications of the cash flow strain of the initial 11 day “surprise” cited above. An ominous sign.

From a pricing standpoint, almost all impacted European wineries graciously offered at 5-10% discount to help absorb the 25% tariff bill. From there one of two things happened. Firms who operated on an “Efficient” business model (i.e. one with minimal channel waste, most often this meaning a direct import route to market) accepted offers from wineries on this 5-10% discount on new invoices, squeezed their own margins to share in the pain, and made small upward adjustments to prices, resulting in retail pricing on average a few dollars higher than it would have been pre-tariff. For the efficient firms things are more or less going by math laid out in the example I used this October where a 3,40 Euro cost directly imported, $12 retail French Chardonnay ends up at $15 retail post-tariff. For this “Efficient” set life is lean but still manageable. How about firms who operate on a “Less Efficient” business model (ie one mostly dependent on three separate 30% margin tiers)? The majority of imported wine in the US comes to the consumer this way. Most of these firms panicked. Anyone in that camp knew that their $15 pre-tariff Chardonnay was already $3 too expensive and that seeing it go to $18 post tariff would mean a screeching halt on the sales front. A 10% reduction in ex-cellar cost from the winery does little to help when you have a 25% tariff with three margins stacked on top of one another, so what we have seen with the “Less Efficient” crew is either denial (i.e. no price changes and no new containers on the water), salespeople agreeing to lower commission rates, or end-of-year layoffs, and in some cases a depressing combination of all three.

The retail side has been slightly less interesting thus far but things will devolve quickly in 2020. At most chains distributor price increases are passed onto monthly shelf tags regardless of whether or not stock was purchased prior to the tariff/price increase. On this front we saw a relative slowdown in depletions of our impacted wines (yes we have fast container turnover and ended up with a long list of Nov 1 price changes) – Consumers in general snubbed their now-more-expensive “first choice” for a similar style replacement from a non-tariffed region. At bottle shops we saw smart buyers avoid early tariff items, preferring to purchase as much pre-tariff stock as they could find while it is still around. For the country’s largest independent retailers, who represent a huge amount of 3PL business for us, we saw a crippling effect – Pricing on this level needs to be competitive with global Wine-Searcher averages, a large volume of these sales are invoiced to end-consumers pre-arrival, and uncertain tariffs meant a complete freeze on futures orders for European wines. Many Bordeaux negociants are penciling in “0’ for their 2020 USA sales projections. Inventory turnover from winery to shelf with this retail sector is fast, and this sort of low margin 3PL business almost always necessitates immediate tariff payment on behalf of 3PL import partners – Something not in the business model or capability of most of the United States’ high-volume independent retailers. Dominoes will fall, even with just the initial 25% tariff.

As if this wasn’t enough chaos we were welcomed with two new tariff surprises in early December, which we will call Tariff Round Two: “The French Digital Services Tax Tariff” and the Tariff Round Three: “The Second Installment of the Large Commercial Aircraft Spat.”

Tariff Round Two

Round two brings us the Trump Administration’s reaction to the new 3% Digital Services Tax France retroactively placed on large American technology companies this summer with a 1/1/19 effective date. What is this tax you ask? In short it is France’s attempt to regain tax revenue that has “gone away” as fulfillment of goods and services continues to shift from French-owned brick-and-mortar firms to multinational digital firms. How does this go down exactly? Let’s say Amazon.fr invoices a baseball bat to a consumer in Dijon. Local French governments theoretically lose out on much the tax revenue that would have been created by a brick-and-mortar firm. Most studies quote this revenue loss at 13% in total (on average digital service “sales” generate 9% in combined French local/national tax revenues, whereas brick-and-mortar “sales” generate 22% in combined tax revenues). The European Union has been working on a unified taxation plan to address this revenue shortfall, but limited progress has been made and the French went rogue in taking a unilateral decision to blaze ahead with their own taxation plan. Why? France has a huge budget deficit and must pay for, among other things, the agreed pension and social safety net demands of the “yellow coat” movement (remember that last winter?). Ironically most experts on either side of the aisle consider France’s Digital Services Tax a tariff in and of itself and the odds are high that if this tax makes it to a WTO trial, France will lose in the same way the European Community lost the Large Commercial Aircraft case this October. Harvard Business Review breaks down this digital tax controversy thoroughly, have a look by clicking here.

Regardless of a person’s position on France’s approach to the taxation of digital services, a tentative “deal” was reached between the US and France this Fall where taxation of such services would be addressed and resolved by 2021 with any overpayments from France’s existing 2019-2020 rates refunded to Amazon, Google, etc. at time of a final multilateral agreement. Everything seemed fine, but earlier this month the Trump Administration decided open up a Section 301 investigation into the “discriminatory nature of the French tax,” playing offense by threatening tariffs during what most pundits assumed would be a balanced 24 month negotiation period. The gory details? The Trump Administration promises a tariff of up to 100% on all French sparkling wines along with many other French luxury goods including most cheeses, spirits, porcelain cookware, and designer handbags. To read the full list of items tentatively slated for this 100% tariff you can click here.

The Trump Administration by matter of policy accepts open comments which are due until 1/6, and we expect a final decision on 1/14. From there we project that this round of tariffs will go into effect 1/17/20 based on the short 11 day notice given the last time around. The consensus amongst government contacts in both the US and in Europe along with our colleagues in the freight industry is that this round of tariffs will proceed in full as threatened. Because it hits some very powerful interests (Louis Vuitton Moet Hennessy for example), things could get explosive and that is of course Trump’s whole point in targeting the categories listed.

As a frightening side note, other countries including Italy and Turkey are attempting to enact similar digital services taxes independently of a more coordinated EU approach. Not good.

Tariff Round Three

Now is the time to talk about Tariff Round Three, which is the result of a 12/2/19 WTO rejection of the EU’s appeal to October’s Large Commercial Aircraft case – The one that put the initial round of 25% tariffs into effect. Why was the EU’s appeal rejected? The WTO determined that the EU is continuing to subsidize Airbus illegally, which resulted in more Trump Administration activity and this new tariff threat. What are the details here? We are looking at a second round of tariffs on a broad assortment of European goods, all of which are threatened to go up as high as 100%, and this time they include all categories of wine and also all EU member countries. To read the whole list, grab a glass of scotch while you still can and click here. The Trump Administration is accepting comments on these proposed tariffs until 1/13, with a likely decision to be announced on 1/17. All final tariffs from this wave are expected to go into effect on product landing in port after 1/28/20, again, based on an assumed 11 day notice period. Kleenex are not on the list which is good because we will need them should this pass.

What Next?

Some importers are hot-shotting wine into the USA in “buzzer beater” fashion – This theoretically works for East Coast ports assuming wine is loaded in the next week or so. Strikes in France are making this difficult however. Others are shipping wine via air freight, which is an approach we’ve taken on some higher-end wines (it makes little economic sense for anything over 15 Euros in cost when you take into account that air freight plus airport customs clearance will run you upwards of $3.50 per bottle on a good day). Both are only band-aid solutions, and gambles at that.

This is all part of a perfect storm when you factor in the other two major global export markets for premium French wine: Hong Kong and London. The riots in Hong Kong brought fine dining/tourism/consumption/trade in that market to a screeching halt, and these riots were ironically triggered in no small part by the US versus China tariffs (attempts to absorb tariff costs on the production side squashed wages in China and Hong Kong fueling the tinder box of discontent necessary for these riots). London as we know is in the middle of Brexit, and amid the uncertainty that engulfs that situation merchants are afraid to make any moves. A Brexit-related exchange rate slump means 10-20% higher post-exchange cost for UK Merchants, and some professionals are predicting UK tariffs of 30%+ on EU wines post-Brexit once the dust settles. At some point inventories will pile up in Europe and we will see a downward price spiral, which will further strain the already modest livelihood of Europe’s farmers. Inventory could pile up for American wineries as well. Why is this? Retaliatory tariffs have already squashed American wine exports to China and retaliatory tariffs from the EU are on the way. When the madness all ends it will be a feeding frenzy of epic proportions for merchants who still have money on hand.

You might at this point ask about the status of the “other” WTO Airbus vs. Boeing subsidy case? You know, the one that is essentially the opposite of the October commercial aircraft case? The United States was found guilty for subsidizing Boeing in exactly the same way the EU subsidized Airbus, and “reparations” (i.e. acceptable tariffs against the US) will theoretically be determined by the WTO sometime in 2020. Why do I say theoretically? Two of the three WTO Judges who made the the October and December decisions are now finished with their WTO tenure. There are no successors to these positions because the Trump Administration is blocking any action on new appointees. You need a minimum of three WTO judges to try a case. This effectively means no WTO (for now anyway), and no WTO means no decision on tariff rights awarded to the EU, and more alarmingly a world with no limit on new tariffs.

As for us at here at Grape we pledge to carry on, fearlessly examining all possible routes to bring you the balanced, handmade wines all of us want to drink with our dinner each night. It will be a crazy year in 2020, but rest assured we will carve out creative/compressed routes to market for your vinous enjoyment. I put together a grid and YouTube video showing market route/margin combinations for some common European wine categories based off of current rates for major wine categories in question – Have a look by clicking here. When time allows I’ll place a editable spreadsheet link in the video notes.

 

Does this all sound hellish to you? Now is the time to make your concerns heard! Please take five minutes today to voice your opinions to the Trump Administration on both proposals. We don’t care if you live in the US, in the EU, if you are in the wine industry, or if you are a consumer – think of this as your duty as a freedom/choice loving human. To comment on Tariff #2 click here and to comment on Tariff #3 click here. All finished with your comments? Good work. Contacting both of your State Senators is smart as well, and also quick to do… most of the time they will even write you back. We made a US Senator contact cheat sheet for you, click here and take action.

Thanks for being part of our community at Grape, and here is to a fair and timely resolution these ongoing trade disputes.

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New Podcast Episode – Jerrod Englefield of Misty Cove Wines

By |2019-12-11T16:40:53+00:00December 11th, 2019|New Arrivals, New Zealand, Podcast|

Brad Roberts hooked us up with Misty Cove Wines of Marlborough, New Zealand earlier this year and the juice has arrived stateside. Misty Cove was founded by former cricket star Andrew Bailey, and Andrew’s longtime friend and former teammate Jerrod Englefield handles all things sales and marketing related there. We’ve never come across this level of quality in Kiwi Sauvignon Blanc for the price, and were happy to host Jerrod in Seattle for a quick visit.

Click here for the episode link on Spotify or here for the episode link on Apple Podcasts.

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New Podcast Episode – Veronique and Caroline Maret of Domaine de la Charbonnière

By |2019-11-25T17:25:37+00:00November 25th, 2019|France, Podcast|

Veronique and Caroline Maret recently flew in for a quick visit, and in this episode you can be a fly on the wall as they taste our California team on the full Charbonniere lineup.

Click here for the episode link on Spotify or here for the episode link on Apple Podcasts.

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Living Anxiety Free in the Tariff Age

By |2019-10-24T16:32:04+00:00October 23rd, 2019|Economics, France, Germany, Spain|

Many of you have inquired about the tariff situation and how it will impact our portfolio. Let’s take a look at what we know, the good news, the bad news, and our plan moving forward.

Any non-sparkling, non-flavored, non-fortified wine labeled 14% ABV or lower arriving into the USA in a package 2L in size or smaller from France, Spain, Germany, or the United Kingdom is now subject to a 25% tariff, to be enforced at port of entry by US Customs Agents until further notice. Now there are plenty of exclusions if we think about this – Most notably any/all Sparkling Wine, wine from France’s warm regions (think Rhone), 3L bag-in-box wine, Modern-style Rioja, and Ribera del Duero to name a few – None of these categories are impacted. Other European countries, notably Italy, Portugal, and Austria, are also NOT impacted. Keep in mind the rest of the world (USA, Argentina, Chile, Australia, New Zealand, etc) are obviously NOT impacted.

Global warming crosses paths with Trump policy again here, albeit in a twisted manner, as warm vintages (2018! 2019!) mean ABV’s that are 14.1%+ thus avoiding the tariff. Believe it or not we just shipped 2018 Sancerre with labs that checked in at over 14%! An unintended consequence will be the rise of the 14.1%+ “Cuvee Américain” – Our friends at Domaine Clos des Lumieres, for example, just selected all of their higher alcohol tanks for our upcoming Rosé and Rouge 750ml Cotes du Rhone bottlings, which keeps us tariff exempt at 14.1% and 14.2% ABV respectively! Clos Lumieres Rouge and Rosé in 3L Bag in Box format? Those versions will come from the lower ABV tanks! Silliness. We might as well have a laugh.

I know where your brain is going right now…What about the a legal 0.5% +/- margin of error that has traditionally been allowed by governing bodies on both sides of the pond? The thinking earlier this month was to have wineries pull up their lab analyses on all categorically impacted wines labeled 14% or below, and have them relabeled at 14.1% ABV if their labs came in at 13.6% or higher. Quick thinking importers encouraged this, and dozens went as far as resubmitting TTB label approval requests with new 14.1% ABV levels on anything that qualified this way. Unfortunately this strategy will not work – US Customs is running their own lab analyses against randomly selected 14.1%+ wines, and proceeding with a tariff on anything that shows American lab numbers of 14% or below.

The big losers? Burgundy, Beaujolais, Provence Rosé, most Loire, most lower tier Bordeaux, Southwest France, Alsace, Alsace, traditional Rioja, Rias Baixas, German Riesling, and Natural Wine (pretty much all Natural Wine…).

HERE IS THE BAD NEWS. Initially we hoped the issue would be resolved prior to the October 18th deadline, but as things stand today we see no resolution with nothing apparent in the works. There are a few different thoughts as to where this is going and when it will end:

Cyrus The Optimist: “Trump wants the tariffs to ‘sting’ but not ‘cripple’ and that they will quietly go away in early December once he has made his ‘point’ in Fox’s news cycles.” Colleen The Realist: “Tariffs will be reversed in about six months (this corresponds to the timing of the expected WTO resolution against Boeing subsidies, which is essentially a reverse case of the Airbus related WTO case that opened the door to the current US tariffs, which would in effect create opposite counter tariffs against American wine imported into Europe).” Zane The Pessimist: “Dammit we are stuck with these indefinitely, or at least as long as Trump is in office.” Mary The Alarmist: “Nooo….We will end up in an escalated trade war with Europe and that these could expand into additional categories and push tariffs as high as 100%.”

Our take at Grape Expectations is that we end up somewhere in the middle between Colleen and Zane.

HERE IS THE GOOD NEWS. Compared to most of our peers our business will be minimally impacted. Why? First off, we only have 200 items in the impacted categories out of the 1,200+ items we stock. Most importantly, we import almost all of the wines in the impacted categories directly. Why do tariffs make direct-importation a larger advantage than ever before? Let’s break out the calculator on an impacted bottle of cool-climate French wine we import, which also happens to be carried by a well-known national importer in the states we don’t operate in ourselves:

Let’s say you have a national importer bringing in a bottle of 13% ABV French wine from a well-known producer, who after exchange rate is paying the winery $4 USD per bottle. This company would pay roughly $1/bottle freight and tax, bringing the landed cost at their warehouse to $5 per bottle. This type of national importer has a standalone corporate office, a marketing budget, a National VP Sales, a team of Regional Sales Directors, and some Area Sales Managers for the major markets. Add to that the associated travel and entertainment that these employees bill on company cards, and all in all this means the company needs to add about a 25% margin to cover costs, plus 5% in additional margin so that they can end the year with the customary 5% net income that the Board of Directors expects their well-compensated CEO to generate. This means the importer sells to the distributor at 30% margin or $7.14/bottle. The distributor pays about $0.50/bottle in freight and state tax, takes its (very necessary to survive) 30% margin, and we are looking at a $11.19/btl wholesale price point for the retailer. The retailer takes a 30% margin and prices this wine at $15.99 for the consumer. The consumer happily buys this wine from coast to coast where it is a leader in it’s high-volume category.

If you add a 25% tariff to this, you end up with a landed cost of $6/bottle, an $8.57/bottle price to the distributor, a $13.29/btl price to the retailer, and an $18.99 price to the consumer! Yikes.

But, you ask, what if you are a distributor who imports most of their wine themselves? That you work at our humbly appointed office space and import this same exact wine? You would pay the same $4/bottle to the winery and the same $1/bottle freight and tax for a landed cost of $5 per bottle. You would add the customary 30% distributor margin plus, say, maybe 10% extra margin to account for the financing/additional warehousing footage associated with direct importing, and you would sell this bottle for $8.39 to the retailer who would sell it at $11.99 to the consumer. Cool.

If you add a 25% tariff to this and keep everything else the same, you’d end up with a $10.49 price to the retailer who would sell it at $14.99 to the consumer, which still leaves you below the EXISTING pre-tariff national retail price for this item and this is with zero help from the winery.

What if we were to tell you that these are exact numbers on one of the best selling wines in our portfolio?

You mean to say Grape Expectations tariff-impacted prices will the same as or better than much of the pre-tariff status quo? Yes – Our ability to source directly puts us at a relative advantage as our West Coast Distribution pricing on own-imported products is generally 25% lower than similar quality (or in some cases exactly the same) products carried by national importers.

On a macro level this situation will mean fewer products in market. Many products carried by “old-model” national importers, small and large, will simply price themselves out of the market with these tariffs, if they stick around.

WAIT AREN’T WE ALSO NATIONAL IMPORTERS NOW? What does this mean for our distributor partners? We set up our “National” arm with current market conditions in mind (i.e. that margins would continue to compress in our industry), and therefore we are able to operate our National Portfolio at razor thin margin compared to industry standards (10-15% out of CA, and sometimes as low as 2-3% in the case of volume DI orders). Our offices and warehouses are paid for, and we reject the idea of a large national “sales team” instead assuming that our distributor partners prefer to manage their own sales internally, with the above-mentioned compressed pricing model used in place of “ride withs” as the recipe for success.

THREE LARGE QUESTIONS REMAIN:

1) Will the volumes of our country’s larger national importers and retailers allow them to renegotiate prices with suppliers in this time of political chaos and end up at a competitive advantage compared to smaller firms? This sounds interesting, but thus far we don’t see that happening. We are seeing the opposite this week actually, with massive reservation cancellations from major importers and retailers. There just does not seem to be enough room to budge when you look at the realities of the 2019 vintage in many tariff impacted regions (Macon saw 40% lower yields in 2019, for example). Bordeaux will be an exception here, where yields were very high in 2019, with backstock also at record highs.

2) Will this sort of increasing populist wave continue to push downward pressure on the Euro for an even more favorable exchange rate? This is very possible – Think about Boris Johnson and his drive yesterday to push Brexit through by Halloween. A weaker Euro Zone economy will push exchange rates lower than the already delicious 1.13 rate, negating much of the tariff induced price pressure (remember, just a few years ago we were at a 1.35 rate).

3) Will bulk bottling European wine within the United States become a “thing”? It just might – Wine importers in China, for example, deal with their own autocracy and tariffs, and bulk bottling is common practice in China to skirt these. Bulk bottling is already the norm now here in the United States with grocery-category New Zealand Sauvignon Blanc due to the insane price of dry goods within New Zealand (i.e. it is cheaper to ship giant bladders from New Zealand to California and bottle stateside). Remember, anything crossing customs in a package 2L or larger is exempt! We will likely have a go at bulk bottling assuming the appellations in question allow it (some will and some won’t). Several of us here have done this already in the past.

HERE IS OUR PLAN. New shipments of many of our tariff impacted items will arrive stateside between now and the end of the year (we turn inventory fast and often over here). These items will see, on average, about a 15% increase in price effective November 1, with our hope being that we will be able to negotiate a 10% discount on most impacted items with most our winery partners, thus covering the 25% tariff in aggregate. As I mentioned earlier in many instances this means that our “new” price will still remain lower than what you’ve seen “pre-tariff” in states serviced by other companies on these same items. Have we been spoiled in Grape Expectations-land all these years? Yes. But use your imagination and plug some of your favorites into Wine-Searcher to see what we mean.

Items stocked from impacted areas by our national importer partners will remain at the same price through the end of the year as these are purchased from stock already in the USA, and have a more sensitive baseline price due to the national importer-related margin economics mentioned earlier. It is important to note that none of this talk is intended to implicate our fine partners on the importer side – The importers we do work with (it is a short list) are firms who share our lean philosophy, bring us wines at sensational value, and we project similar 15% increases on their items as they negotiate pricing with their suppliers and receive new loads from Europe Q1.

Hopefully this clarifies the subject for you a bit. Here is to living large without tariff-related anxiety and to a strong finish to 2019.

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