The Economics of Everyday Things - 51. Wine Corks

Episode Date: June 10, 2024

Why do we use a specific kind of tree-bark tissue to seal up 70 percent of wine bottles? Zachary Crockett takes a sniff and gives the waiter a nod. SOURCES:Carlos De Jesus, director of communications at Amorim Cork. RESOURCES:"This Ancient Material Is Displacing Plastics and Creating a Billion-Dollar Industry," by Marta Vidal (The Washington Post, 2024)."Troubled Times For Wine In 2023: Global Production And Consumption Shrinking," by Per and Britt Karlsson (Forbes, 2024)."Three Studies Take A Look At Various Wine Bottle Closure Preferences," by Thomas Pellechia (Forbes, 2019)."How Millennials (Almost) Killed the Wine Cork," by John Gifford (The Atlantic, 2016).

If you travel through southern Portugal's dry, hilly Alentejo region between the months of May and August, you might hear this sound. That moment, that sound is exactly the same sounds the Romans heard 2,000 years ago. That's Carlos de Jesus. He's the director of communications at Amorim Cork, the world's largest cork producer. And the sound he's talking about is an ax hitting a cork tree during the cork harvest.

It's a delicate job. The harvester has to cut into the tree just enough to access the layer beneath the bark. That layer, the cork itself, is then stripped away. The tree becomes orange and there's this really sweet honeysuckle kind of smell around and there's a thump and the birds are singing, I can tell it's truly magical. Amoram's cork gets turned into a variety of products. Shoes, flooring, insulation.

But about one-third of it is carved into little cylinders that get stuffed into the necks of wine bottles. And every year we sell about six billion of these corks around the world. Those six billion corks translate into more than $800 million in annual revenue. But these days, in the wine business, cork is no longer the only game in town. Back in the 90s, cork would have 96, 97% market share. And we all know that your propensity to listen when you have 96 or 97% market share, that propensity does not go up on the contrary.

So we pay the price for that. For the Freakonomics Radio Network, this is the economics of everyday things. I'm Zachary Crockett. Today, wine corks. Cork has been harvested in the Western Mediterranean region for thousands of years. Early civilizations used it to make sandals and fishing gear, or to close jugs and barrels. It wasn't until the 17th century that cork found what some might consider its true calling in northeastern France.

So it is when a little-known wine region called Champagne, back in the 1600s, it had a problem eastern France. Legend has it that the first person who had the idea to close a champagne bottle with a piece of cork was a monk with a familiar name, Dom Perignon. While champagne in other regions of France became famous for their wines, the story of cork itself is distinctly Portuguese. Well, as a Portuguese, yeah, cork is part of your identity. It is the only thing where effectively and objectively Portugal is a world leader. Portugal produces half of the world's cork. But that didn't happen by accident.

Portugal's climate is very hospitable to cork oak trees. It's sunny, humid, and not particularly rainy. But there's another reason the Portuguese have remained the world's biggest cork producers. The protection of the cork forest in Portugal dates back to the 1200s. We have over one-third of the cork forest in existence in the world. The cork oak tree is a species called quirkus subur. They can live for centuries, and each one can produce 100 pounds of cork every time it's harvested. Cork oaks are also beautiful to look at, with wide trunks that turn orange after the harvest and dark green leaves. So why isn't every country planting forests of quk asuber to get into the cork market?

It turns out, cork production has a natural barrier to entry. It's a slow-growing tree. You cannot touch a cork oak until about 25 years have gone by. So that's more or less when you do the first harvest. The first harvest does not yield quality cork. And by law, you cannot go back to that tree until at least minimum 9 years have gone by. Second harvest, still not good enough to make natural cork stoppers that are the big generator

of value for both the forest and industry. It's only the third harvest, so off the bat you're going to have 43 years of growth and care before that tree matures. People are planting cork oaks, but you have to have a certain vision and a certain way of looking at sustainability and the long term that it's not really on the radar of a lot of people. After it's been stripped from the mature trees, the cork gets hauled away to massive outdoor storage units, where it seasons and stabilizes for six to nine months.

Then it's boiled, which sanitizes it and also makes it more pliable. Afterwards, humans and machines assess millions of planks of cork to decide how each one will be used. And that decision is going to determine if that piece of cork is going to end up in a bottle of wine. Only 30% of these millions and millions of planks of cork is good enough. Once its caliber is determined, the cork is cut into strips and punched with a machine to extract the cylindrical stoppers. Following yet another round of quality control,

Amarum ships its corks out to more than 20,000 wineries around the world. They rely on Amarum's corks to keep their wine safely inside the bottle and to improve its taste over time. One single cork stopper packs into it about 800 million cells. Each one of them carries a little bit of a gas very similar to the air that we breathe, which of course has oxygen, and that is going to shape the evolution of that wine just as it shapes any other chemical reaction. And winemakers around the world know that the choice of closure is the ultimate winemaking decision. Wine drinkers care about that decision too. A 2019 study from the Journal of Wine Economics found that U.S. consumers will pay an average

of 8% more for a bottle of wine that has a cork closure rather than a screw cap. But cork has its challenges. It can actually ruin a bottle of wine and it's expensive. Natural cork closures can cost up to $2 each compared to screw caps, which costs around 25 cents. Today, cork stoppers are found in just 70% of wine bottles, a drop of more than 25 percentage points from 30 years ago. And that's a shrinking share of a shrinking market,

because wine production and consumption are on the decline. So how does the world's largest cork producer cope? That's coming up. how does the world's largest cork producer cope? That's coming up. In Portugal, cork is a significant industry. Exports of cork and cork products exceeded $1.2 billion in 2022. And most of that revenue comes from wine corks. Amaramalone sells around half of all wine stoppers produced all over the world. So when something goes wrong, people take notice. What was threatening the industry is something called 246-tricloroanisole. This actually had an impact in people's lives, in jobs, in companies, in businesses. Trichloroanisole, or TCA, is the culprit behind what's commonly known as cork taint.

It's a component that is mainly a byproduct of environmental contamination, environmental pollution, and that generates enough flavor or enough smell in cork that can ruin a bottle of wine. And for a long, long time, we didn't really understand what it was. Cork production methods in Portugal in the 80s and 90s may have compromised quality and seemed to have led to an increase in cork taint. According to Wine Enthusiast magazine, by the 2000s, as many as 9.5% of wine bottles were contaminated with TCA. Typically, rates of cork taint hover around 3%. As the problem persisted, winemakers turned to other kinds of closures, like plastic, synthetic

cork, and screw caps. Buyers didn't mind those alternatives, and the cork industry saw cork taint as an existential threat. Since we got our proverbial kick in the back from the plastics and then the screw caps, the research and development start producing really, really interesting results. In 2016, Amaram unveiled

a sophisticated chemical analysis system called NDTech. It uses a process called gas chromatography to identify trace amounts of TCA in every wine cork they produce. So we have that system to a cutoff point of 0.5 of a nanogram. It's something like finding one drop of water in 800 Olympic-sized swimming pools. DeJesus says ND Tech has effectively solved Amram's cork taint problem, but he knows that with nature perfection is often elusive. This is the moment where the scientists will tap on my shoulder and said remember there's no such thing as zero in science.

It's easy to fall into the temptation of promising perfection in this world. We have a really good risk management policy, and that's what we have been doing. But for a lot of wine drinkers, the damage was done. Screw caps, in particular, have gained in popularity since 2000, especially for wines meant to be drunk soon after they're purchased. In the US, around 30% of bottles use screw caps. In other parts of the world, it's a lot higher. New Zealand would use about 95% of metal closures.

Australia would be about 75-78%, but you know what? Until the pandemic, the fastest growing market for cork anywhere in the world was Australia. If Australians don't mind drinking wine from screw-capped bottles, why did they suddenly start buying more corks? It turns out that Chinese drinkers demand wines with cork stoppers. China became the leading export destination for Australian wine. And if you want to sell a bottle of wine in China, it's very clear what you need to do.

There's another glaring difference between cork stoppers and other types. While screw caps and less popular alternative closures like plastic and glass can be recycled, none of these alternative materials enjoy the same kind of afterlife as cork. There's a handful of organizations that collect cork for recycling, and AMRM also runs cork recycling programs around the world. In 2023, it collected 915 tons of cork and turned it into all sorts of products. And in its second or third life, cork can be as much as $1,200 to $1,300 a ton. Now, this is a lot more than the equivalent amount of plastic or other recycled materials that we recycle on a daily basis. A recycled wine cork can't be turned into another wine cork, mostly for hygiene reasons.

Instead, it becomes flooring, construction materials, home furnishings, even insulation on rocket boosters. And of course, footwear. The brand Birkenstock is famous for its use of cork soles. De Jesus wouldn't tell us whether Amorim provides the cork for any specific brand, although he did describe one big customer. It starts with a B, and it's very fashionable, and a lot of happy, famous feet are wearing

them. In most cases, turning trees into consumer goods damages the climate. Trees store carbon, and removing one means more carbon in the atmosphere. But harvesting cork from cork oaks boosts their carbon consumption because they absorb more CO2 as they grow back their lost bark. That massive amount of CO2 that cork retains is going to be there for a longer period of time. And in addition to its cork recycling programs, Amarum also uses cork dust to power its factories.

We have some cases where they operate 95% of their energy needs coming from cork dust. It makes you wonder why we aren't planting more cork oak trees around the world. Until you remember that it takes several decades for cork oak to produce a viable product. If I propose to any of our listeners, you know what, I have a great business idea. We're going to literally and figuratively dig a hole on the ground, pour a lot of money into it, and then we're going to cover it, lay back, and wait 43 years for this asset to start maturing and yielding something interesting. That would be a short meeting. start maturing and yielding something interesting. That would be a short meeting.

So Amorim is trying to speed up this notoriously long process. Two years ago, they spent $65 million to acquire nearly 20,000 acres in Portugal. And on that land, they're using a very specific irrigation method to fool the cork oaks. We found out that if you trick the tree into thinking that there are enough resources that the tree can grow faster, then the tree does grow faster. We have demonstrated that we can cut that down to 10-12 years. As Amarum cork's new trees grow and mature, the industry is looking optimistically at other emerging trends. Some of the best champagnes I've ever tried in my life used the traditional cork for transportation that the consumer is going to open. But before that, there is another cork being used to stop that bottle during that so-called tirage part of the process. From a business point of view, of course, it means that one bottle has two stoppers instead of one.

And de Jesus might be a bit biased, but he thinks everybody can get behind a world with more wine corks. Imagine that you could run a poll around the world and ask everybody, regardless of age and gender, whatever, what do you think are the five happy sounds of humankind? I bet you that that pop on that cork will be one of them. For the economics of everyday things, I'm Zachary Krakat. For the economics of everyday things, I'm Zachary Kroket. This episode was produced by Julie Kanfer and Sarah Lilly and mixed by Jeremy Johnston. We had help from Daniel Moritz-Rapson.

There's this show on television, it was called Pimp My Ride or something like that, it was terrible. But I don't think that you need to pimp your wine. The Freakonomics Radio Network, the hidden side of everything.