No, U.S. Wine Industry Consolidation Has Not Gone Too Far

by Andrew Chalk

Has the U.S. wine industry consolidated too much was the question asked yesterday by The Wine Economist (Mike Veseth). Throughout, his analysis is numbers-intensive. His article is presented as the case for, versus the case against, and comes to the conclusion that it is not clear (“on the one hand…on the other hand”, to paraphrase, is how he concludes).

My analysis is much less equivocal. Consolidation has not gone too far. The executive summary of the rationale is that wine prices (for given quality) are lower than ever, and consumer choice is greater than ever.

In fact, not only is U.S. wine market consolidation not too great, but it doesn’t matter, per se. It only matters if it hurts consumers. Large firms can yield enormous gains to consumers. They can also raise prices and reduce choice. In the wine market, large firms appear to be the result of economies of scale in production and in sales. With long-term prices declining over time these scale economies appear to be passed on to consumers through competition.

The Wine Economist considers ‘market power’ as synonymous with size. But that isn’t the case. How much does he think giant Gallo can raise the price of its segment-leading Barefoot Cellars before losing sales to a host of competitors in that supermarket segment? I would regard the market power of tiny Château Lafite as far greater. If it raised the price of a bottle (especially in a good vintage) by $200 it would lose only a small number of buyers.

When we discuss wine we also have to consider the definition of the market. If a giant winery raises prices, how much in sales does it lose to spirits, craft beer, and maijuana? These are empirical questions and the numbers need to be estimated before we can bandy around stories about ‘market power’. The greater the propensity of consumers to substitute away from wine as a category, the less the market power of wineries, of any size, to raise prices.

That substitution has, in fact, been happening. Silicon Valley Bank has been on a multi-year campaign to warn the industry that consumers are switching, especially to cocktails. The progressing legalization of cannabis is yet to fully reveal its effect on the demand for wine.

PRO-COMPETITION MEASURES THAT STILL TO BE ENACTED

Unrestricted DTC

A recent ‘Great Leveler’ between large and small wineries is direct-to-consumer home delivery. It boomed during pandemic lockdowns. Changing state laws to facilitate it across the country, along with national retailers to consumer shipping, would do more to promote competition than any antitrust breakup of big wineries.

Abolish State Laws That Protect Competitors, Not Competition

Anti-competition laws designed to protect competitors rather than protect competition such as ‘minimum price laws’, state liquor stores and the three-tier system (bans on direct sales) are clearly anti-competitive and their abolition long overdue. Wine retailing should be as open as toothpaste retailing in order to lower prices and permit the widest consumer choice.

The author has a Ph.D. in Economics with a specialty in Industrial Organization.