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THE DRINKS BUSINESS: The Evolving Economics of Burgundy Wine

The evolving Economics of Burgundy Wine is Changing how the Product Reaches Customers

Burgundy wine has never been more acclaimed – nor more in demand. While this should signal boom times for Burgundy winemakers, poor yields are instead forcing these winemakers to carefully consider the economic realities of their position. As a result, the region is embracing new practices that are transforming how wine makes the trip from the vineyards of Burgundy to your cellar. BurgDirect CEO Jeff Rubin explores.



Unfortunately, every Burgundy vintage between 2010 and 2016 was affected by low yields, with some years producing less than half the normal volume. In fact, worldwide wine production plummeted to a 60-year low in 2017, largely attributable to poor weather conditions across Europe. And within Burgundy, French appellation laws further limit winemakers’ options: regulations restrict the use of fruit from other sources and disallow overproduction in bountiful years from the most prestigious premier and grand cru vineyards.

At the same time, several of these years saw Burgundy produce wines of exceptional quality – particularly the 2010, 2015, and 2016 vintages. These two defining factors – short supply and tremendous quality – have naturally resulted in surging demand.

The largest driver of this increased demand, however, is the shift in Asian markets toward Burgundy. Having first gained popularity in Japan during the 1990s (followed by Singapore), the 2010s have seen China embrace Burgundy to a degree that it has now surpassed even Bordeaux, the reigning favorite. For example, in 2014, Acker Merrill’s Hong Kong auction market saw Burgundy sales outpace sales of Bordeaux by 30%; that is a meteoric rise up from only a small fraction of sales a decade earlier.

Burgundy sales in the United States have also steadily increased over the same period. This is in conjunction with the red hot market for pinot noir – a continuation of the so-called Sideways Effect, which rides the wake of the 2004 movie in which the lead character extols the virtues of pinot noir above all other grapes (and is particularly ruthless towards Merlot). The Hollywood influence has unmistakably helped fuel a 170% growth in American pinot noir production since the movie came out, and has similarly contributed to a domestic thirst for the Burgundian expressions of the grape as well.



Prices and pressures

Naturally, Burgundy’s constrained supply and spiking demand has resulted in skyrocketing value. In addition to the Economics 101 forces at work, the winemakers of Burgundy are now in a position where they must make careful decisions in how they allocate their reduced supply to the most advantageous and profitable channels and markets.

At the same time, many Burgundy winemakers are taking care to avoid the potential long-term harm of rushing headlong to the hottest buyers and putting too many eggs in one proverbial basket when it comes to determining their market distribution. This is part of why China still lags behind the United States, the United Kingdom, Japan, and a few others in Burgundy exports. The need to address these concerns is also driving the exploration of new avenues for bringing Burgundy wines to sale.


The rise of Burgundy’s direct-to-consumer wine sales

The direct-to-consumer sales model, already familiar and popularized by premier wineries in Napa, Sonoma and elsewhere, is now experiencing adoption among Burgundy winemakers. This is largely because the tactic offers advantages that can serve the exact needs of these winemakers given their evolving economic position. Direct sales mean that fewer middlemen take a cut of profits, allowing winemakers to retain a higher portion of the sales price for themselves. Given the scarcity and cost of Burgundy wines, both winemakers and customers find value in the guaranteed authenticity and proper handling of these wines along the journey from vineyard to consumer. Customers also like the feeling of having a more direct relationship with wine producers, thereby enhancing the intrinsic value of the wine itself. In turn, winemakers value the direct feedback from both Burgundy connoisseurs and newcomers, which they cannot easily solicit through less direct channels.

In the United States, direct-to-consumer methods now account for 60% of domestic winery sales, an industry set to surpass $3 billion this year. Whether selling through developed mailing lists or at their own cellar door, the vignerons of Burgundy have now adopted this fruitful business model, and anticipate a high yield of benefits for both themselves and their customers.



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