What will the wine industry look like in 50 years?
The first in a (potential) series of posts about the long-long-term future of the wine business.
What will our society and economy look like in 50 years?1 That was the question posed in a recent public radio piece. According to MIT professor Erik Brynjolfsson, the best case scenario is the average American will have most of their material needs provided for by advanced technology. But in the worst case scenario, 90% of Americans won’t be able to make a living wage, and they’ll be angry, while the top 0.1% gains enormous wealth.
So either we’ll live a life of leisure off the fruits of robot labor, or… most everyone will be destitute and rioting while our plutocrat masters2 keep us down. Quite the range of outcomes!
According to Brynjolfsson, if we find a way to fairly distribute the wealth created by advanced technology, everything will be OK (oh NPR!).3
But income inequality has been front and center in the public consciousness of late. Obama says it is fraying our social fabric. It’s the subject of vigorous debate between economists (actually The Economist and Greg Mankiw) about the “Great Gatsby Curve” (see below), among other things.
And it raises a serious question: is greater income inequality good or bad for the wine industry?
You might think greater income inequality is good for the high-end wine industry, the Harlans and Ch. Lafites of the world and not so good for the Barefoots and Cupcakes at the low to medium-end. I don’t think it’s that simple.
The wine industry can grow by selling more volume or increasing price (or both). Consider a thought exercise: income inequality at its most theoretical (and unrealistic) extreme, where all the wealth is concentrated in the hands of one person, would obviously be very bad for the wine business since that one lucky SOB who can afford wine can only consume so much of it. Your bank account can be thousands or millions of times larger than mine, but your appetite for drinking wine probably isn’t and certainly just because you’re rich doesn’t mean you’ll necessarily want to spend ungodly amounts on wine.4
The other theoretical (and equally unrealistic) extreme, where everyone has the exact same income, probably wouldn’t be good for the wine business either, but it depends on the overall level of wealth. If everyone were sufficiently wealthy to afford wine as an “everyday luxury”, it might be a great thing for wine revenues. On the other hand, some amount of inequality is necessary to market luxury and ‘aspirational’ products. In this world, like any other (former) luxury good, wine would no longer indicate social status but rather personality, eccentricity, culture.5
Clearly neither extreme will happen. The tricky part is finding the right balance.
What does the data show?
As one would expect, overall wine consumption is highly correlated (99%) to the overall level of income in the U.S.6
The overall wine industry in the U.S. and globally will most likely be significantly larger in 50 years than it is today.7 As long as the economy is significantly larger than it is today, the wine business will likely be too.
As for the high-end of the wine business, the reality is that its bread and butter is not billionaires or even 100 or 10 millionaires, it’s the professionals with expense accounts, the highly-paid tech workers Zuck employs, business owners celebrating a life event or accomplishment…
As long as the number of people who can afford high-end wine continues to grow, the fine wine industry will be in good shape.
The data seem to bear this out. High-end wine consumption is highly correlated (99%) with the number of households earning over $150,000 a year.8
So let’s all root for more upper middle-class households who buy Sonoma Pinots and Napa Cabs! However, the slowdown in the growth of $150K+ households since 2000 is worrisome.
The question then becomes, is the U.S. economy poised to create many more modestly-affluent households in the future?
Income mobility is certainly one important factor that will help to grow the ranks of the modestly-affluent. The children of poor families that reach the middle and upper class will probably drink more wine than their parents did. Some argue that increasing income inequality in the U.S. is OK since income mobility is still strong.
Enter the “Great Gatsby Curve.”9
Unfortunately, as the curve illustrates, countries with high income inequality also have lower income mobility between generations, which is only logical really. In the words of journalist Timothy Noah, “it’s harder to climb a ladder when the rungs are farther apart.” The rung the high-end wine industry should care most about is probably that $150K / modestly-affluent rung, but it’s unclear what exactly this analysis means for the number of people who will rise above it.10
Further academic research is needed on the dynamics at the high-end of the wine business (it’d also be great if reliable data were captured at higher price segments), but if I had to guess, increasingly extreme income inequality would be, on balance, a bad thing for the wine industry.
Let me first say that if you were choosing a time period over which to prognosticate, 50 years is just about ideal. Accountability? Zero (I might still be alive, but by then who cares?!). The possibilities? Endless! ↩
Who hopefully won’t be robots… ↩
I oversimplify. It’s a complex question about who the winners and losers will be in the economy of the future and the best set of policies to balance overall economic growth with economic equality. It pits capital vs. labor; high-skill labor vs. low-skill labor; “superstars” vs. the rest of us. Our institutions will play an important and delicate role balancing overall economic growth vs. evening the playing field between winners and losers. ↩
Don’t know about you, but a lot of wealthy people I know drink a lot of cheap wine (Clos du Bois by the pallet!). ↩
Your neighbor might collect first-edition comic books. You might collect Persian rugs or Vicuna sweaters. But you’d have to really be into those things because you’d have to forgo other “luxuries”. ↩
Chart sources: Gomberg Fredrikson & World Top Incomes Database (http://topincomes.g-mond.parisschoolofeconomics.eu/). I use California producer revenue as proxy for U.S. wine sales. ↩
For now let’s set aside Malthusian concerns about our ability to simply feed the world’s growing population. Of course climate change has the potential to have major impacts on the wine industry, but that’s another topic entirely. ↩
Sources: Gomberg Fredrikson & US Census Bureau ($150K in constant 2009 dollars). ↩
In other words, if rising inequality mostly affects even higher rungs—if it becomes harder to climb from $300K to $1M or $1M to $10M, but no harder to rise from $50K to $150K, that would have a much different effect on the wine industry than the opposite. ↩