“Those of you looking for the French version of Yellow Tail should be pretty excited for Friday.”
By David Riccione
This January I went on a vacation with family and friends around Northern California’s wine countries – Napa in particular. It was my first time visiting a premier New World wine region (save the Finger Lakes, my home region – see Riesling), and I expected the fully immersive experience to generate plenty of writing ideas for Wine Econ papers on the American scene. Although trying Lodi’s lauded Zin, and a dozen of Napa’s Cabs, the trip ironically brought me back to the Old World, and a question about the price of European wine.
While staying in a Napa Marriott, my family and I returned after a few tastings to find the lobby saturated with semi-formally dressed (it’s California after all) folks with tens of bottles of wine between pairs. The festivities, we found out, were actually importers and distributors meeting to taste wines which said importers were pushing onto the retail segment of the value chain.
Naturally, I spoke with a few importers, curious to see how business was with what has been, to say the least, a dramatic foreign exchange environment. Not to my surprise, business was quite good – the US dollar at a rarely seen strength, especially relative to wine producing nations’ currencies, and with pressure from premiumization, much of the value was being captured by the importers.
So my bottom line question was natural: as a consumer, am I getting cheaper wine from Europe?
Strengthening US Dollar
Since mid 2014, the US dollar has gained dramatic strength in global currency markets. More relevant to us, however, is the dollar’s growth story relative the Euro, the currency chosen by the world’s largest wine producing economic zone to denominate the prices of our favorite vino.
For those readers not familiar with Forex, the idea is rather simple: there is a market to buy other nations’ currencies, and to buy a particular currency, one must pay with some other (usually domestic) cash. When demand for a single currency rises, more traders and businesses are competing to acquire said currency, and thus must be willing to forfeit more of their own currency to outbid other competing buyers. In essence, this is the dollar story. Over the last two and a half years or so, the demand for dollars by those with Euros has risen faster than the demand for Euros by those with dollars, and thus the price of the dollar has risen in terms of Euros.
There are innumerable factors behind these developments, but rising interest rates in the US coupled with near zero bounded rates in Europe have incentivized European investors to hold their wealth in dollar denominated securities that reap a higher yield. Questions about the future of the EU, the persistence of the Greek issue, Brexit, unending double digit unemployment, and teetering Italian banks have all pushed European investors into US assets, increasing demand for the dollar and flooding supply for the Euro.
Stronger Dollar, Cheaper (Bulk) Wine
To the point, though, what about our wine? A stronger dollar, in theory, should mean cheaper real prices for Euro denominated assets like vino! The textbook models tell us that the same bottle of wine from Chateauneuf du Pape (Southern Rhone) that was being sold from the estate for 40 Euros in 2014 at an exchange rate of, say 1.33USD/1EUR, would be sold to the same importer at 1.06USD/1EUR today. This means that the importer would have been paying $53.2 in 2014, and $42.4 today even though the price of the wine in Euros hasn’t changed.
Obviously, consumers haven’t seen their wines discounted to the magnitude enumerated above, which can be accredited, among other reasons, to the fact that wine retailers usually stock wine imported from a number of vintages, which can average out gains from Forex over time. However, some products–particularly cheaper bulk wine–have retail prices that are quite sensitive to Forex changes.
Those of you looking for the French version of Yellow Tail should be pretty excited for Friday, because the statistics show that for wine products with much thinner margins (bulk wine), a strengthening dollar has pushed retail prices down considerably. The graphic below, sourced from Dutch Agricultural Giant Rabobank, elucidates material declines in the average dollar price of Chardonnay from Chile and France, mixed results from Australia, but clearly a rise from the US.
The takeaway here is obvious, if you’re looking to capture the most value from the strengthening dollar in your next wine purchase, you’ll find the heaviest discounts in cheaper European cuvees.
Weakening Pound, Even More Deals!
Yet, a weak Euro relative to the dollar isn’t the only thing delighting American wine consumers. The decline in the British pound relative to the Euro is also indirectly squeezing the prices faced by Americans.
As the pound slips, the currency effect is exactly the opposite of that of the dollar. Brits are now being forced to pay more pounds for the same wine price that is denominated in Euros – whereas once the pound bought 1.4 Euros it now only buys around 1.2. British importers used to purchase a bottle of Cotes du Rhone costing 14 Euros for only 10 pounds, but today they pay nearly 11.66 pounds, and that extra cost is passed on to retailers, which is eventually passed on to consumers. Note that under both exchange rates, the Cotes du Rhone still only cost 10 Euros, and the Forex rate alone hiked the price in pounds.
That explained, how are Americans benefitting? Given that Brits are paying more pounds for wine with unchanged prices in Euros, they are in turn importing less wine. Accordingly, European exporters are compensating for the lack of demand by competing for more space in the US market. This added competition is driving down the Euro denominated price. This is important because it explains that not only are American consumers paying less because the dollar is worth more, but also because the intrinsic price is falling as well (i.e. the price in Euros).
According to Rabo’s 2017 Q1 Wine Research Update, “The ongoing weakness of the British pound following the Brexit vote will continue to create challenges for exporters targeting that market,” which will make the US “an increasingly attractive market, barring any major adverse changes to trading terms under the incoming administration.”
Quick Proviso: Who Captures the Value?
We’ve established already that consumers are garnering a considerable amount of the value created from a strengthening dollar in the market for bulk wine, as prices demonstrated an inverse relationship with the dollar’s strength. But this is not quite the case for premium wines.
The metrics show that retailers have been less willing to discount premium wines even though the marginal cost in dollars to acquire them have fallen with a weaker Euro. Retailers may be less likely to drop the price because of consumer stigma for cheaper bottles. Furthermore, prices may also be staying stubbornly high because demand for premium wines has been increasing dramatically in the United States, as consumers tastes and preferences are becoming more sophisticated. This demand growth could be outpacing the discounting effect of Forex on price.
According to research done by Rabo Research Analyst Herbert Gates, “Premiumization trends continue to drive the US wine market, with most of the growth coming from price points above USD 10 per bottle sold.”
Ultimately what this means is that a stronger dollar is only benefiting importers and retailers in the market for premium wines, and consumers are less likely to see better prices from top quality imports. Obviously this is a bit of a bummer for those of us who aren’t in the mood for Beaujolais Nouveau. On the bright side though, the dollar’s strength is looking like it is here to stay, so cheers!
Rannekleiv, S., & Gates, B. (2017). January 2017 Agribusiness Review (Beer and Wine Markets, pp. 1-3, Rep.). New York, NY: Rabobank.
Rannekleiv, S., & Soccio, M. (2017). Wine Quarterly Q1 2017 Global Sector Update(pp. 1-8, Rep.). New York, NY: Rabobank.
What’s Driving U.S. Dollar Strength? (2016, November 16). Retrieved February 25, 2017, from https://www.bloomberg.com/news/videos/2016-11-17/what-s-driving-u-s-dollar-strength
U.S. Dollar Index (DXY). (n.d.). Retrieved February 25, 2017, from http://www.marketwatch.com/investing/index/dxy/charts
Veseth, M. (2016, February 01). How Much Has the Strong Dollar Affected U.S. Wine Imports? Retrieved February 25, 2017, from https://wineeconomist.com/2016/02/02/how-has-the-strong-dollar-affected-the-u-s-wine-market/