Economist says location is one way vineyards differentiate their products

By MATEUSZ PERKOWSKI

Capital Press

When cash-strapped consumers began trading down to less expensive wines, Methven Family Vineyards tried to adapt with a second label at a lower price point.

The Dayton, Ore., winery has since realized that trying to compete by lowering prices can be a risky strategy for wineries, said Allen Methven.

"Hard to go up, easy to go down," he said of price trends.

The vineyard has since dropped the second label and tries to stand out based on quality.

"We have to make a great wine because we don't have a brand name," said Jill Methven, his wife.

Focusing on "terroir" -- the sense of place conveyed by wine from certain growing regions -- may be the best long-term bet for boutique wineries like the Methvens', according to an economist studying the wine market.

Globalization in the wine industry has exposed consumers to a tremendous variety of labels and regions, though the plenitude can often prove overwhelming, said Mike Veseth, economics professor at the University of Puget Sound and author of the book, "Wine Wars."

"We live in a world where there's a lot of nowhere-ness," he said during a recent lecture at Linfield College in McMinnville, Ore. "I think terroir-ists are the answer."

Veseth pointed out that few other consumer food items enjoy a similar variability in price and origin as wine -- some grocery stores carry hundreds of wines ranging from $2 to $200 per bottle.

"At no time in history did people have more choice in decent wines," he said.

When Veseth sent his economics students to study behavior at grocery stores, however, he found that many consumers were frightened off by the multitude of offerings.

That's because information is asymmetric in the wine industry, preventing the market from working efficiently for consumers, Veseth said. In other words, when consumers don't know if they're getting a good value, they're more likely to walk away from the wine aisle empty-handed.

"When they look at a bottle of wine, they don't know what's inside of it," he said. "They are the missing customers in the wine market."

Some consumers respond by turning to experts like Robert Parker or magazines like Wine Spectator, while others gain confidence from a retailer's reputation -- for example, the Trader Joe's grocery chain, Veseth said.

With the rise of the "locavore" movement, terroir is poised to be a way for wineries to inspire trust through positive associations with their appellations, or wine-growing regions, he said.

For areas still developing their global status, like Oregon's Willamette Valley, protecting a reputation for quality is crucial, Veseth said.

While many in Oregon's wine industry see the Burgundy region of France as a positive model, they should also be aware of the "cautionary tale" of the Beaujolais appellation, he said.

Beaujolais is also capable of producing fine wines like Burgundy, but the region has tarnished its brand by making sweet, fizzy wines to clear out inventories during periods of overproduction, Veseth said.

Ultimately, such a strategy would be unsustainable in the Willamette Valley from the economic perspective as well, due to high production costs in the area, he said.

Rob McMillan, a lender specializing in wine at the Silicon Valley Bank, said terroir is an increasingly important marketing tool throughout U.S. wine-growing areas.

"Otherwise, what you end up with is just a commodity," he said. "You can find other places to grow a commodity less expensively."

In California, for example, much of the commodity-based vineyard acreage was pulled out nearly a decade ago due to overproduction, McMillan said. "There were other countries that could produce that bulk juice at a lower cost."

The challenge is that many consumers still don't understand the difference among appellations, said Joe Dobbes, a winemaker in Dundee, Ore., who caters to the fine wine and value wine ends of the price spectrum.

With the economic recovery still lagging, Dobbes said he sees more growth potential for inexpensive wine than for luxury wine. Even so, he said the terroir-oriented fine wines have a following among higher-end consumers.

"I think in the long run it will be valuable," he said. "I don't think it hurts anything. Those who want to grasp it will grasp it, while those who don't won't go there."

For more on this issue, listen at http://capitalpress.blogspot.com/2011/10/podcast-boutique-wines-potential.html