Tech Innovation in the Wine Industry, Pt. 1

Amid the pandemic, the wine industry suffered tremendously – from catastrophic weather events in California, Italy and Germany and, global supply chain disruption to growing threat of price inflation. Despite the chaos, the global market for wine grew from US$326.8B to US$340.23 billion in sales in 2021. Restaurants are rebounding, off-prem sales are booming and the industry is proving its capacity for creativity, adaptability, and resilience. In 2022 and beyond, I anticipate the market to be more responsive to innovation. What does that mean though?

When you think about wine, technology doesn’t tend to come up. Wine ignites the senses and most often, you’re thinking about the flavor, smell, body and how the wine makes you feel at the moment. Moreover, science and innovation have been the foundation of grape growing and winemaking – from monks observing grapevine cycles and adjusting their practices accordingly to smart developments in fining and storage. In short, the wine industry has been generally slow to adopt new technology. It’s a “who you know” sort of business that still relies primarily on excel, poorly created websites… the list goes on. The pandemic proved to be a bright spot for wine industry though; those operating in it were forced to innovate as sales moved online. There are other pressing concerns like fraud and climate change that require a heavy investment in technology and will ultimately change how the industry operates in the future. . I’ll talk through some contemporary innovations that are pushing the business of winemaking ever forward.

IoT & Sensor Technology: Challenges in the vineyard have always been a concern for winemakers – the devastating blight of phylloxera in the 19th century is one example. Managers use different tools to improve crops, manage costs and track environmental impacts. Precision viticulture is a term that comes up, often associated with how to increase efficiency, reduce disease, and maintain quality. Predicting a vineyard’s yield is of paramount importance for winemakers. When you have an accurate yield idea, you can allocate your resources better for the season. This includes everything from water, to fertilizer, to barrels, to staff. New technologies enable producers to take historical data of the vineyard and apply it to the current wine season's early activity. Now, with climate change an increasing risk, winemakers have a myriad of other issues to consider too, and technology is stepping in to help mitigate these threats. IOT & sensor technologies are increasingly deployed in the vineyard, winery, distribution and on the bottle itself.

In the vineyard, sensors are deployed collect data on weather patterns, sun exposure, rainfall, pH, nitrogen levels, soil conditions, humidity, wind direction and speed. Drones have allowed growers to take overhead shots of their crops with thermal infrared cameras to give detailed information on the plant’s health that a regular camera could not provide. This allows the farmers to assess which vines need nourishment and spread irrigation and fertilization more efficiently. Drones with infrared light are used to determine optimal harvest time and picking order. particularly in farming and production management. IoT examples include using intelligent tracking devices to check up on the health of grapevines and the presence of invasive species. Automation is even driving the handling of soil temperatures and hydration.

Some new applications:

• A winery in Oregon built UV Robot to battle the blight of potentially destructive powdery mildew

• Winemakers in Burgundy are tackling extreme storms with high-tech systems that deploy particles of silver iodine into the atmosphere to form a shield against hail.

• LIDAR, a remote imaging technology, allows for the structure of the vineyard to be mapped in 3D. Crop 3D modeling allows for site specific management. This promotes greater control over the processes of growing grapes and assists grape growers in meeting the demands of winemakers. It’s also used to extract biophysical parameters to monitor dynamics of vegetation, the water cycle, energy budget and other variables for decision making programs. It can also be easily incorporated into current machinery or tractors to scan the field while doing other tasks such as tillage of fertilization. The resulting information is easy and fast to process which can be incorporated into decision support systems or used for automatic pruning systems or site-specific fertilization.

• Satellite Imagery: Satellite images can also be used during a period of the growing season known as véraison, a critical point in the vine’s growth when grapes turn from green to red or white. Monitoring crop vigor at this stage gives the winemaker time to modify management of individual vines with a goal of optimizing the harvest. It also allows winegrowers to optimize the decision-making process by showing the yield variability allowing them to take advantage of this variability for applying selective harvesting to increase the quality of the wine.

• Cisco has an industrial IoT solution that can track temperature, light, humidity, and water availability, block by block of an estate. It offers insight into tannin development by measuring the amount of light hitting individual grapevines. This allows a winemaker to not only figure out when grapes are ready for harvest but reduces a vineyards dependence on water. This, coupled with neutron probes, can provide substantial real time data that reduces

Artificial Intelligence (AI) & Machine Learning (ML)  for Wine – this can be used anywhere up or downstream in the chain.

In my opinion, here are some practical applications for both:

• Applying AI to different wine critic reviews to create a database that synthesizes all the different reviews to provide more clarity on taste markers and what makes a 90+ plus wine for a specific region. The goal is not to replace wine critics but to provide a more comprehensive analysis of wine for consumers.

• Machine Learning & Sensory Science: analyzing tens of thousands of wines combining analytical chemistry, consumer flavor preferences, and ML to predict market performance for sensory-based products. This could help winemakers produce or enhance a style of wine (decision assistance in the winemaking process) or target their customers more efficiently.

Current Applications:

• AI & Robotic Cameras: Researchers have used AI and a robotic camera to cut the time spent examining grape leaves in the lab from six months down to a single day. Until now, labs were slowed by the need to manually check thousands of grape leaves for evidence of infection. Blackbird was developed by the USDA_ARS program. It’s a robot that uses a camera to gather information from the leaves with the detail of an optical microscope. Given the detail of the information, a sophisticated analysis using deep neural networks is required to help predict the plant variety, plant stress, and mitigation techniques for many other factors in the vineyard.

• AI & Blending: California winemakers are using AI to help salvage grapes damaged by smoke from the state’s massive wildfires. Ahead of harvest, dozens of vintners used AI-powered models to identify viable blending options that mask unwanted smoky flavors. Narrowing the blending options can reduce production delays and get wines onto store shelves faster, compared with the time and expertise needed to taste-test as many variations as possible. Blending in smoke-tainted grapes adds an extra layer of complexity  to the winemaking process and is much more sustainable (i.e., less waste).

• AI & Smoke Taint Detection: bushfires are climatic anomalies related to climate change that is severely affecting the grape  growing industry. Smoke contamination and taint in wines is difficult to assess. Current assessment methods require berry or wine sample collections and specialized lab analysis that is time-consuming, cost prohibitive and more importantly, not representative of the real level of contamination within a vineyard. AI based on short and proximal remote sensing combined with ML modelling can be used to assess and monitor smoke contamination and smoke taint in wines and implemented with unmanned aerial vehicles (UAV) and infrared thermal imagery (IRTI) to map regions of vineyards according to smoke contamination levels. Near-Infrared Spectroscopy (NIRS) could offer a quick assessment for amelioration techniques to reduce smoke compounds in berries and taint in wines. E-noses have been developed to assess smoke-related gases in wines to predict smoke taint or be applied to the vineyard to monitor ambient gases and levels of smoke contamination in bushfire events.

• Customer Experience (CX) and Personal Experience: Vivino  has rolled out Match for You, a new app feature that provides wine drinkers with a percentage likelihood that they will enjoy a specific wine. Vivino recently raised a $150M round and announced their funding would be used to improve AI, focusing on increasing personalization. Vivino users primarily relied on the Vivino Rating, a five-star wine rating system that leverages the wisdom of the crowd to show the average score of a wine.  Match for You uses ML and the insights Vivino has on each user to give each one of them a unique match score for every single wine scored in Vivino. There are match brackets that apply a % chance that you’d like the wine. I’ve found this tech hasn’t worked well and operationally, it’s a nightmare (from personal experience).

Drones & Last Mile: Last-mile delivery is not a new trend, but wine tracking apps and shipment notifications are. Getting wine to the consumer can be challenging, especially when shipping networks are at capacity and the contents are fragile. Sellers must deal with expensive packing materials while they meet unique state legalities on how and where to deliver. The addition of specialized last-mile services specific to the wine industry is becoming a real possibility for more producers. Just like Amazon has its own last-mile delivery drivers, we could see more wine-branded vans and trucks pulling up to hand-deliver those precious bottles directly to the consumer, guided by the efficient uses of tech-equipped GPS, wine inventory apps, driver guides, and optimized routing. When vans or trucks can't make the drive, there's still an option for drones. While the drone business is fraught with FAA regulation, local zoning ordinances, and the limitations on drones themselves, we're seeing it done well in some industries already. In areas where drones are embraced and normalized, the prospect of delivering a $100 bottle of bubbly in a drone-delivered basket is not farfetched and something I’d welcome on a hot summer day. In fact, it could be cheaper and safer than driving across town in rush-hour traffic for that single bottle.

Now this is only part of the technology being used and innovation in the wine industry. Join me next week while I breakdown technology in aging, robotics and my honest assessment of the software that exists in industry today.

Wine Investing 101

Why Invest in Wine?

Classic cars. Watches. Fine art. Fine Wine. All investments of passion. I recently started investing in fine wine and found it’s more fun, lucrative, and… liquid. Here’s why:

The last two years have been all about timing in the capital markets, and if you got that wrong, you likely made an expensive mistake. But, not so for wine. In 2021 alone, fine wine prices rose 15% outpacing other real-asset investments like Hermes Birkin Bags and rare bottles of scotch. While the Omicron variant continues to spread, leading new countries to be added to the red list, fine wine sales are booming. Demand soared in 2021– luxury fine wine merchant and global trader, Bordeaux Index, saw overall trading volumes up by 40% with newer entrants like Champagne and Italy driving up volumes – and the trend for increased consumption and investment is showing no sign of slowing. Overall the market is up lsd% and fueled by a surge in spending in part by high net worth individuals who have more cash to splash amid lockdowns.

However, the investment grade wine market has more to offer than just impressive returns.

• Tangible Ownership: You have direct ownership of the object. Even if your wine investment company disappears tomorrow, you still retain ownership of every bottle in your portfolio. This also means that you can drink your wine and enjoy it (at any point of the ownership lifecycle). You can’t really enjoy your declining GME investment.

• High Capital Growth: the market has delivered 13.6% annualized returns over the past 15 years, outperforming most global equities even in the decade long bull run and exchange-traded funds (ETFs).

• Low Volatility: Fine wine has seen 16 months of consecutive gains and increased 119% in that time - merchants held firm on pricing, showing signs of a stable market and is less volatile than real estate or gold.

• Portfolio Diversifier: they say “don’t put all your eggs in one basket”. A well-diversified portfolio can protect your bottom line from a variety of risks. Fine wine is unique as it has a low correlation with traditional assets and the stock market.

There are other benefits like potential inflation and currency hedges.

Liv-ex is where I get most of my data - it is the "the global marketplace for the wine trade” and has a number of indices, but focuses on the Liv-ex 100. This index tracks the price of 100 of "the most sought-after fine wines" on the secondary market (think Burgundy, Bordeaux) as "the industry leading benchmark." Over the past year, the Liv-ex 100 grew nearly 21 percent. Comparatively, the Dow Jones Industrial Average only gained 14.43 percent over the same period while gold actually declined nearly 4 percent. (S&P500 did edge out wine for the year at 23.2 percent growth so don't dump all your stocks quite yet.)

So – what actually is investment grade wine? It’s tangible asset whose value is expected to appreciate over time and is dependent on two factors – quality and scarcity. Your top wine pick? Top end Italian and Californian wines with a slight resurgence in Bordeaux first growths.

How to ID investment grade wine?

The technical definition of investment grade wine is: fine wine that has a chance of increasing in value after 5 years.

Identifying fine wine can be tricky so I’ve outlined some ways to identify great investment opportunities. There are a few terms that are must-knows. Let’s explore:

• Critics Ratings - the wine generally must have a score of at least 95 points by one or more of the principal worldwide wine critics.

• Price Appreciation - the wine must have a consistent history of substantial price appreciation over a 10-year period.

• Liquidity - the wine must be made in sufficient quantities so it can be bought and sold on the secondary market.

• Longevity - the wine must be able to age for at least 25 years with maturity occurring after the 10th year.

  • Here’s a quick reality check - most wines are not meant to be aged. Red wine have an average shelf life of 5 years and whites 2-3 years. To be investment-grade, wine must have a balance of acidity and tannin (the higher the better), alcohol, and flavor.

• Pedigree - the wine must be produced by a chateaux, domaine or producer whose name is synonymous with quality and prestige. Wines made in the Bordeaux region, Burgundy, Rhone Valley, Tuscany or Piedmont in Italy tend to be more valuable over time.

Other things to know about and consider when investing wine?

Historically, there’s been a supply and demand imbalance in the fine wine market. The supply of wine is usually constrained because it is 1) produced in limited quantities

• The effect of scarcity on price can be seen with well known brands. As an example, 2012 Domaine de la Romanée Conti (DRC) in Burgundy produced less than 4,500 bottles, which now sell for upwards of $13,000 per bottle. In comparison, first growth Lafite from Bordeaux produces 15,000 to 20,000 bottles per year, which sell for closer to $500 per bottle. For wines produced in limited capacities, the inverse relationship between price and quantity is accentuated as supply dwindles.

And 2) most top fine wine producing regions have restrictive classification system and zoning laws. There’s also a huge demand for these wines – traditional buyers and the emergence of wealth in China, Russia and other emerging markets; following an interesting pattern driven by these emerging markets but also by its behavior as a Veblen good (demand for certain wines increasing as price increases). The prestige-seeking behavior of wine investors helps explain the outsized price tags on wines. Additionally, because the quality of wine cannot be ascertained before consumption, buyers often rely on critic’s ratings, such as Robert Parker, giving certain individuals vast influence over prices.

Provenance is also probably the single most important concept in the fine wine market. It’s a catch all referring to whether the wine is genuine and how well it has been stored and if it’s fraudulent. It tells you the ownership history, source, authenticity, life cycle and storage of the wine. This can help you get a gauge for the price of wine and sell it with the right valuation. Aim to get a certificate of authenticity and try to learn generally about its storage and transit conditions.  

Earlier, I mentioned that the fine wine market is typically less volatile. This is not to say that there are no risks associated – you must consider a few risks: wines can get mishandled or damaged in storage, in transit or due to a natural disaster. The value of wine doesn’t increase indefinitely. At certain ages, wine can become undrinkable (~50 years – depending on the type of wine) and it may be difficult to identify the right time to sell it. And, as mentioned, fraud in the wine industry has become a thing.

 You absolutely must consider costs. Base price, costs that go into storage, insurance and shipping. Capital gains tax are a doozy – places like France, the UK, Germany and Hong Kong deem wine a wasting asset since it eventually declines in value and are usually free of capital gains tax. You must incorporate fees and commissions if you’re not doing the buying yourself. I also like to think of opportunity cost of the investment.

How to invest in wine?

Investing in wine is not as straightforward as executing an equities trade. Traditionally, you need lots of capital and the right connections. Investment grade wines come from the top-level Bordeaux (Lafite Rothschild, Latour, Haut-Brion, Mouton Rothschild) and gaining access challenges even the savviest investors.

Today there are more ways to invest in fine wine and more knowledgeable buyers around the world. People are more sophisticated and tech savvy than ever.

There are a ton of ways to invest in fine wine, all with varying risks and results. Let’s explore some:

• You can invest in blue chip wine stocks and other funds like:

  • Investment Houses/Wine Funds – investors can buy shares in a wine fund that pools investors' capital. Fees vary.

    • Sommelier Capital Advisors Investment Fund - merges high-end wine with active professional investment. Only for Accredited (high-net-worth) Investors. Requires long-term commitment (minimum five years.)

    • Wine stock exchanges like Cavex (3% commission), Liv-Ex, and Berrys’ Broking Exchange have a good collection of fine wines that can be shipped internationally. 

    • Blockchain-Based Wine Investment Platforms – Alti Wine Exchange sells tokens through IBOs – initial bottle offerings. Tokens are backed by wines stored in Bordeaux. Available to non-accredited investors.

• Other Investment platforms –

  • Vinovest – Invest a minimum of $1,000 plus fees based on risk tolerance. The company offers algorithm-based portfolio balancing, storage, and insurance. You own the wine, so you can drink it if you want. An insurance policy guarantees provenance.

  • Cult Wines – For $15,000, you access a global portfolio. A $45,000 investment includes management services, valuation, advice, and access to en primeur allocations. Wine experts verify provenance.

  • Rally – Rally accumulates funds from many participants, then buys collectibles (wine/art/cars/watches). Investors buy “shares” in these asset classes with a low-cost point of entry. A partnership with Cult Wines verifies provenance. You can sell shares after 90 days.

• En Primeur – essentially wine futures, granting an investor the opportunity to invest in wine while it is still in the barrel (i.e., before it is bottled), but more on this next week!

• You can buy bottles of wine and store them yourself or at a specialized facility with the goal to sell at a higher price in the future. Specialized facilities are basically temperature and humidity-controlled storage rooms. This can get spicy, but I’ve provided some tips:  

Deep Dive into Buying Wine Directly

Like I said earlier, do thorough research. You should research which vintages and wine makers have done well in the past and look at trends by wine experts and analysts. Understand what’s happening at the auctions, track market data on online wine exchanges like (Liv-Ex). Read reviews by wine critics, tasting notes, manufacturer’s details on websites like Wine Searcher, Wine Spectator, or Decanter.

Determine how much you can invest. I often see that you need at least 10,000 USD to start and like all dividend paying stocks and bonds, invest in a diverse range from different regions and vintages.

Decide where to buy wines from. I’ve listed a few channels here:

• Direct from Producer – Buying directly from a producer is effective, efficient, and it guarantees provenance. But it can be challenging or impossible to get on allocation lists.

• Wineries –Buy wines directly from a prestigious chateau or local vineyard, and get them shipped to your address. Often, there are several regulations with international wineries that may not allow you to buy wines directly. They also charge a huge buyers premium.

• Brokers – Working through a broker, importer, or distributor offers more access and expertise. Costs will be higher, could be up to 10% more - Wine brokers offer personalized advisory services, and transact and trade on your behalf

• Auction Houses – they can offer expertise and access hard-to-find wines that come on the market from private sellers. They’ll add a 10-25% charge. Newer online auction platforms may be less expensive. like Sotheby’s Wine and Christie’s.

• Traditional or Online Retailers – You can buy investment-grade wine from your local retailer. Selection may be limited. Retail pricing is higher, so shop around for the best prices..

Where to sell your wine?

There are several ways to sell your wine:

• Auctions - In-person and online auctions are popular. Commission charges for online houses are lower than in-person like Sotheby’s.

• Wine Stock Exchanges - Cavex and Liv-Ex can facilitate P2P selling. They charge a selling commission of usually less than 10%.

• Other Private Collectors - sell your wine to private wine collectors or enthusiasts.

• Speak to a Financial Advisor

 Fine wine is so unique as an asset class – its defensive in times of economic crisis and can benefit from economic upside when wealth is created and spending on luxury assets is high. More importantly, technology advances in the industry have brought new levels of efficiency and transparency to the wine market and now, more consumers than ever can invest in wine as an asset class.

Note: I am not a financial advisor and this is not financial advice. I’ve recently started investing in fine wine and this is simply an outline of my research.