Record California Crush Changes the Game
“Definitely and ultimately it points to the same thing, which is imbalance,” said Jeff Bitter, president of the Allied Grape Growers.
Bitter’s said it hasn’t been a rush of planting that has brought these changes but rather a slowing of consumer demand. “Had demand continued to grow at the pace it had been growing, or the trajectory it was on, we wouldn’t be talking about imbalance,” he said.
Based on recent and historical sales trends, Bitter said planting was on track to meet reasonable projections of future wine sales and consumption. “That’s part of the problem, sales projections and forecasts are not being met.”
While recent years saw acquisitions to secure supply or the best possible grape prices, the pendulum has suddenly swung in the other direction, and Bitter said the industry can’t simply blame a bumper 2018 harvest.
Not unprecedented tonnage
Bitter said 2012 (4.02 million tons) and 2013 (4.24 million tons) yielded similar tonnage and the industry was able to move that fruit. Those vintages did follow the short 2011 crop and were supported by the recession recovery yet “we’re not crushing an incredible amount of grapes we haven’t seen before.”
What has changed is that a significant amount of tonnage has moved from the inland areas of California to coastal regions. Bitter said growers in the Central Valley quickly adjusted to the decline in demand for wines priced less than $10 per bottle. “Today I can confidently say, because I sell grapes all over the state, the Central Valley is in the best place in terms of market balance.”
In the coastal regions, Bitter said much of the new acreage in Napa and Sonoma counties are replacement acres of higher-producing vines. Lake County and the Central Coast have seen significant new acreage. Most of that new development was winery-driven and the majority has been new Cabernet Sauvignon and Pinot Noir acres.
“This year is going to have characteristics of a correction for certain varieties and regions,” Bitter said. “I think the answer to that — besides increasing demand and shipments — some of the existing acres, those that aren’t top-performing need to come out.”
More Cab and Pinot acres will be coming on in the next few years. According to the state’s latest vineyard report, there are 5,662 non-bearing acres of Cab and 2,657 of Pinot, and this has become an acute issue in Paso Robles.
He stressed there was no reason to hang on to underperforming vineyards in the Central Coast and growers should instead consider where they can find a niche for a lesser planted-variety to support a winery’s direct-to-consumer program. “I don’t know how much time it’s going to take but the reality is if you have a weak or underperforming vineyard just don’t waste your time farming it,” he said. “Why waste good money after bad?”
- Cabernet Sauvignon by Region
- North Coast
- Central Coast, Interior
- Region Data
- North Coast Data
- Central Coast, Interior Data
Cautious on supply
“Especially in the coastal areas we had a lot of tons,” said Glenn Proctor, partner and global wine and grape broker for The Ciatti Company in Novato, Calif. “There was a lot of fruit that was harvested in 2018 and I think most wineries at this point are being very cautious when looking at supply.”
In early May, Proctor described the wine and grape market as being a bit of a lull. “A lot of the bigger buyers, bigger wineries, they’re not buying because sales are stunted or they have lots of inventory or they’re selling themselves,” he said.
In terms of the overall market, Proctor said wineries still can’t raise prices significantly in all categories and many are still trying to maintain margin as sales volume lags. The increased supply has now left some wineries, even those that have brands growing at rates of 10% or more per year, in the position of not needing additional 2018 bulk wine to meet growth projections. Instead, they have excess wine to sell.
Proctor is also concerned about the growth in the number of Pinot Noir and Cabernet Sauvignon acres that were developed in the last five or six years to take advantage of rising prices and wineries being priced out of appellations such as Sonoma or Napa counties.
Paso Robles, where a significant number of those new acres were planted, has suffered already. In 2018, Proctor said there were about 8,000 tons of uncontracted Cabernet that sold for less than $400 per ton resulting in a decline of 7.4% in the average price to $1,386 per ton.
Growers were urged to remove older, less efficient vineyards at this year’s Unified Wine & Grape Symposium in January and that message is likely to get more urgent in light of the current market. Farming costs, expected to continue to escalate, will be even more of a burden because of lower demand and weaker prices. The best move in 2019 or 2020 may be to secure the deal and price you can, rather than haggle to stay ahead of costs. “This is not the year to argue with your buyer about labor,” Proctor said.
- Cabernet Prices by District and Region
- Napa Versus North Coast
- District, Region Data
- Napa Versus North Coast Data
The same strategy holds for bulk wine. “I can tell you right now the market for Napa Valley Cab is $25 to $32 (per gallon), maybe you can ask for $40 or $45 but if you ask for $65 you scare that buyer away.”
Compared to previous years when availability was of more important than price, the current market can provide buyers with plenty of choice at their preferred prices. “The challenge is the prices aren’t necessarily something to write home about or cheer about,” he said.
There’s still a long way to go until the 2019 harvest, but in light of the record-setting abundance from 2018 and less-than-stellar market demand, Proctor doesn’t see the market swinging in favor of growers any time soon. “For 2019, the pavement has been laid and, unless there’s something unexpected, it’s going to be a slow, tough market.”
Steve Fredricks, president and partner of Turrentine Brokerage in Novato, Calif., described the current market as much different than 2009 and 2010.
While Fredricks acknowledged the changes bring challenges, he said Turrentine continues to put together deals and there remains a “lot of opportunity.” Rather than buyers seeking to secure larger volumes at one time, they may check in every few weeks to see what’s available and at what price. “We had a good crop in ’18 and we have new acres, there’s an opportunity,” he said.
Most interest is fueled by négociant and private label buyers rather than large, national brands. He said growers and wineries need to evaluate their relationships with an eye toward how the market may continue to evolve. He said whether it’s growing or staying the same, it’s always changing and so everyone needs to be ready to renegotiate, find a new niche or develop something new. “It’s a dynamic time, maybe grapes aren’t being recontracted as quickly as possible but there’s still plenty of good demand in grapes and bulk wine,” he said.
Fredricks stressed it’s even more important to stay informed about the trends shaping the industry. “If you have been and are thinking long term about what you can do and diversify, you’ve been preparing for these kinds of things and you’re prepared to deal with it … [then] you’re able to lessen the most damaging market dynamics,” he said.
It’s not just California that saw the 2018 harvest outstrip previous vintages.
Oregon also anticipates a large harvest, likely above 35,000 tons, though the final numbers have yet to be released (the 2017 harvest was 33,631 tons). This has helped push down demand for vineyards, as fruit is outstripping crush capacity. There’s plenty to go around and wineries are having to adjust even as Oregon wines see solid demand relative to those from other areas.
Challenges in Washington
The situation is more serious in Washington, where Ste. Michelle Wine Estates is the dominant purchaser, typically buying two-thirds of the state’s wine grapes. Some growers dropped fruit in 2018, but the harvest nevertheless rose to 261,000 tons, second only to the crop of 270,000 tons in 2016. Ste. Michelle is preparing for the rising tide to continue in 2019.
“Washington is currently in an oversupply situation, as consumer demand has slowed while at the same time more new vineyards have come on line or come into full production,” explained Ryan Pennington, senior director of communications and corporate affairs with Ste. Michelle. “We have elected not to extend a handful of contracts representing a relatively small portion of our overall supply.”
Oversupply wasn’t the only reason for not renewing contracts, he said. Some contracts were not renewed because even though the fruit coming in was good, the site wasn’t necessarily optimal. “We’ve given our grower partners as much notice as possible, and it’s possible that we may return to sourcing from some of these vineyards in the future,” he said.
At the recent Vineyard Economic Symposium in Napa, Calif., Joe Ciatti, a partner with the Santa Rosa, Calif., based brokerage Zepponi & Company, said in a session on acquisitions and vineyard pricing a rush to plant that has depressed the market for vineyards and put Washington’s industry “in a world of hurt.”
Some anticipate the situation could last three years, though much depends on consumer demand. One thing’s clear: there’s no shortage of good wine for private labels.
Ste. Michelle is investing resources in marketing and boosting demand for Washington wine, which the state’s wine commission says has been under pressure on the home front over the past year. Other companies, like Precept Wine, have been adjusting supplies by thinning clusters early in the season and developing new products to meet the demands it sees in the market. “[Precept] has a lot more versatility because of its robust innovation business segment and resources are well-allocated,” spokesperson Heidi Witherspoon said.
British Columbia, at the northern tip of the West Coast, seems to be alone in bucking the trend.
A good economy and low production has given wineries ample room in the market, and wines made entirely from local fruit now account for approximately 19% of wines sales in the province. While a definitive report hasn’t been released, B.C. growers expect the harvest to exceed the 32,706 tons harvested in 2017. Nevertheless, it continues to lag market demand. “It’s like everywhere in the province,” winemaker Bailey Williamson of Blue Grouse Estate Winery on Vancouver Island said of the situation in his region last month during a media preview of the first wines from the vintage. “There’s some serious pressure on grape purchasing.”
This has helped push up land prices both on Vancouver Island and in the key Okanagan Valley, where the federal agricultural lender Farm Credit Canada indicates prices average $97,903 CAD an acre, up 6.3% from last year.
— Andrew Adams, Peter Mitham
The Impacts of Gallo’s Mega Deal
While retailers and consumers won’t notice anything different — not at first, anyway, though there are rumors that brands like Ravenswood could be taken up a notch — the change in ownership promises further consolidation among distributors.
Most of the brands changing hands sell for less than $11 a bottle, a segment that represents 70% of off-premise sales through multiple-outlet and convenience stores tracked by market research firm IRI. The segment is also home to 18 of the top 20 brands (by value) IRI tracked through the same retailers in the 52 weeks ended Apr. 21. Three of those — Black Box, Clos du Bois and Vendange — are part of Constellation’s deal with Gallo, which already owned the top-selling Barefoot brand.
Constellation and other players are focusing on higher price segments ($11 a bottle and up), but the move by Gallo reflects a measure of hope around the cheaper but high-volume segment even as vintners follow consumers to more expensive tiers. Speaking to the Wine Analytics Report in February, Zepponi & Co. principal Matt Franklin said large companies like Constellation looking to divest themselves of lower-priced brands faced a tough market.
“Who is going to buy those?” he asked. “Somebody that needs access to the U.S. wine market and needs volume to have some sort of clout with distributors and is able to acquire those to go ahead and get that clout – but they’re international.”
Gallo’s acquisition strengthens its hand, reinforcing its dominant position and allowing it to manage the segment in its favor, say observers. “When the supplier is larger and more powerful, they are able to demand more from a wholesaler,” said one winery executive with experience of the distribution business, speaking on background. “Gallo is one of the more demanding suppliers in the nation because of their portfolio. You have to be able to touch every restaurant, every chain grocery store and every independent in the state where they do business.”
The number of wholesalers with that kind of reach in each state is limited; the largest states might have three, the smaller states might have two or one. A glance at the largest markets in the country in the Wines Vines Analytics distributor database shows Gallo having established relationships with five wholesalers in California (including its own, Gallo Sales Co.), two in New York and one in Texas. There is no overlap in these three markets with the distributors Constellation uses. The two vintners use seven companies each to cover Illinois and Florida, with one common player in each state.
This promises a major shift, though no one would comment on what might be in the offing. Peggy Davidson, who directs corporate communications for Texas-based Republic National Distributing Co., said it was too early to comment as the deal had yet to close. Republic represents Constellation in the state, while Gallo’s representative in Texas is Southern Glazer’s Wine & Spirits LLC, which declined comment because it didn’t have Gallo’s permission to speak.
Brands typically go with the acquiring company, however. This means some distributors — both large and small — will lose business as the transition unfolds. According to the Wines Vines Analytics database, if Gallo places the brands with its own roster of wholesalers, the brands will move from 95 separate companies nationwide to just 70. Southern Glazer’s is the largest distributor in four of the five major markets, holding a 56% share of sales in Florida, 48% share in Illinois and 34% in California; all states where it represents Constellation; while it could gain from a shift in Texas, it’s vulnerable in these and other states.
Gallo will undoubtedly push to grow the brands it has acquired, which could put further pressure on other brands competing for buyers at less than $11 in off-premise outlets. The pressure won’t only come at retail, but behind the scenes, as distributors choose where to focus sales efforts.
“Those 30 brands are larger than most wholesalers. So they’re really not looking to put anyone in business; they’re looking to take these brands over and grow them,” said the executive who has experience on both sides of the table. “These brands are going to have to be emphasized at some level, probably more than they have been, and it’s a finite universe of distribution. So it’s entirely possible that some smaller brands may be impacted.”
Higher-priced brands will see little impact, because they’re filling a niche unique from the one frequented by consumers spending less than $11 a bottle. However, vintners such as the Wine Group, which also targets value-conscious consumers, could be in for a fight. Together with Trinchero Family Estates, the Wine Group and Gallo are the top three suppliers in the price segment. Neither Trinchero nor the Wine Group responded to requests for comment. Retailers were also mum when asked to comment on how changes might affect them.
A key challenge for vintners is getting the attention needed to build market share and move through the large volume of juice on the market. Altria Inc. gave evidence of this earlier this year, when it reported the write-down of its Columbia Crest brand. Sales were down, and the oncoming wave of juice from the 2018 harvest — which saw plenty of fruit dropped — put it in a difficult position (its subsidiary, Ste. Michelle Wine Estates, has not renewed contracts with some growers).
“It’s hard to get time and attention on your brands when you’re competing against all of the other suppliers,” the winery executive said of the situation facing vintners. “It’s a fight for focus and attention, and as these distributor houses get larger, this is going to make it more complicated, more difficult.”
Gallo, on the other hand, has been here before — literally. When it acquired Columbia Winery and the Covey Run brand in 2012, the purchase was hailed as an opportunity for Washington wines to get national distribution. Now, with Hogue Cellars coming under its wing and a large volume of Columbia Valley wine seeking a home, Gallo’s size may give Washington and established brands like Hogue the clout needed to find a new niche as consumer preferences shift.
Jeff Bitter, president of the Allied Grape Growers, said the deal could be something that reverberates through the industry for years. He said it’s always a challenge when a grower loses a buyer, but in this particular situation Gallo is a known entity. “Gallo is a Californian family-owned business that has showed its loyalty to California in many different ways,” Bitter said.
He added it’s also good to see a leader in the wine business make a significant investment in the lower-priced tier of the market. “They didn’t buy 30 brands with the intent of doing nothing, they bought them to do something. I’m excited to see what Gallo’s plan is to utilize their presence in this segment of the business to appeal to the next generation of consumers,” he said. “Consumers don’t start drinking wine at $20 a bottle. Somebody has to appeal to them to get drinking wine at all.”
— Peter Mitham, Andrew Adams
Wine Industry Metrics: Steady Sales Growth
U.S. wine sales increased 7% in April to $3.8 billion, according to bw166, supporting steady growth in the latest 12 months of 3% to $48 billion. Domestic table wines enjoyed the strongest gains. While off-premise sales tracked by Nielsen decreased 1%, direct-to-consumer (DtC) shipments increased 12% to $325 million. Rosé sales enjoyed some of the strongest growth across channels. Winejobs.com’s Winery Job Index perked up after several months of decline, rising 4% from a year earlier to 499. The strongest demand was for sales and marketing staff (up 24%) and winemaking and production positions (up 11%).
U.S. wine sales increased 7% in April versus a year earlier, market research firm bw166 reported, rising to $3.8 billion. Sales in the latest 12 months increased to nearly $48 billion, up 3% from a year earlier. Among domestic wines, table wine sales maintained their momentum in the latest 12 months, increasing 4% to nearly $43 billion while sparkling wines inched up 1% to $2 billion. Meanwhile, sales of bulk imports pulled back 18% to $1.6 billion.
Nielsen reported that sales of domestic table and sparkling wines through the off-premise outlets it tracks fell 1% to $844 million in the four weeks ended Apr. 20. Case sales approached 9.5 million for the month, down 4% from a year earlier. Table wine sales, which represent the largest share of domestic wines, led the decrease. Sales of domestic table wines in glass packaging fell nearly 5%. Sales in the 52 weeks ended Apr. 20 increased 1% to $11.2 billion, while volumes in the period declined more than 1% to 126.9 million cases. Growth in value exceeded volume growth as consumers’ continued to spend more but drink less, a trend also seen in the monthly figures.
Off-premise trends reflected what has been seen in on-premise accounts. A report by Nielsen CGA, a new partnership between Nielsen Co. and CGA Strategy Ltd., indicated that rosé enjoyed the strongest sales growth among on-premise table wines, with value increasing 3% in the 52 weeks ended Feb. 23. White wines have the highest absolute dollar growth, however, adding more than 1% to total $8.2 billion in the period.
Direct-to-consumer (DtC) shipments rose 12% in April versus a year ago to $325 million, Wines Vines Analytics/ShipCompliant by Sovos reported. Shipment volume totaled 648,631 cases, up nearly 8%. Shipment activity reflected the fact that April had five Mondays, a traditional day for shipments. Value continued to outpace volume as consumers spent more on fewer bottles. The average bottle price in April was $41.74, up 4% from a year ago.
Cabernet and Chardonnay enjoyed the strongest growth in average bottle prices during the period, with each varietal rising 5%. The average value of a bottle of Cabernet was $71.99, while a bottle of Chardonnay is worth $33.50. Chardonay is the fourth-ranked varietal in the channel, with shipments worth $237 million.
Winejobs.com’s Winery Job Index gained 4% in April versus a year earlier, ending the month at 499. While year-to-date activity remained 3% less than a year earlier, the uptick in April underscored the moderation taking place in hiring rather than an outright decline.
Among the major subcategories, demand for sales and marketing staff increased 24% while winemaking and production positions gained 11%. Demand for direct-to-consumer positions, including tasting room and retail staff, fell 16%. Weaker demand for vineyard labor resulted pushed the index for that subcategory down 11%.
What Keeps a Grower Up at Night
Craig Ledbetter is part of the third generation of his family to run Vino Farms, a multi-region California vineyard owner and management company based in Lodi, Calif. He describes Vino Farms as “California’s largest non-winery owned vineyard management company.” It farms nearly 17,000 acres, of which 2,700 acres are owned outright by the family. Its operations extend to Sonoma, Napa, Monterey, Yolo, San Joaquin, Sacramento, San Luis Obispo and Santa Barbara counties.
Ledbetter joined Vino Farms in 2006. Today, as vice president and partner he manages the day-to-day operations of the family’s and clients’ 4,500 acres of vineyards in Lodi, handles all winery relations and grape sales for the Lodi and Paso Robles areas and is also closely tied to several of Vino Farms’ large clients, which requires him to travel the state. Ledbetter graduated from California State University, Fresno, with a B.S. degree in agriculture economics and worked for a bank, a recruiting firm and a technology company before joining Vino Farms.
He serves on several national and statewide boards, including Wine Market Council, AgSafe, California Wine Grape Inspection Advisory and Lodi Winegrape Commission.
Q: What keeps you up at night? What are you most concerned about within the industry right now?
Craig Ledbetter: Rising costs of labor, state regulation, and not seeing a price rise in the Lodi area. Actually, we’re seeing a little less money here per ton on average across all varieties today than we saw in the ’90s, and our expenses have gone up basically 100%. In the other regions, we’ve seen the price of grapes go up with the cost of farming.
On the high end of the wine industry things are good, but we did see some prices fall in Napa and Sonoma in 2018, and we’re getting requests from wineries in 2019 to potentially look at contracts, and if there is any way that we can reduce price on those contracts and potentially get more term or length out of them, or different payment terms. We understand and we look at the importance of that relationship and making it work for both sides. We need them and they need us.
Q: What other immediate threats worry you?
Ledbetter: The 40-hour work week that’s coming toward agriculture. There’s no way to work through that one. It takes more hours a week to farm than 40. One thought is to run two shifts, but you have to double the number of employees to do that. For each employee, there is overhead and that overhead is an extra expense.
It doesn’t matter how good of a salesman you are, when the market’s down, it’s down. There’s nothing you can do about it except continue to foster, and hopefully grow, relationships.
Q: You’ve been at this for 13 years. Is this the gloomiest outlook you’ve seen?
Lebetter: Oh no, before I came to work for my family, I sold data storage in the high tech world, and I felt like I was a good sales rep and I could sell anything to anybody. I learned very quickly when I came to work for my family in 2006 that this industry is not that way, that it’s cyclical and it doesn’t matter how good of a salesman you are, when the market’s down, it’s down. There’s nothing you can do about it except continue to foster, and hopefully grow, relationships.
Q: What’s looking up in terms of varieties and regions?
Ledbetter: If you have the right varieties to make rosé, so if you have Grenache and Shiraz, things like that, then obviously that rosé market is booming. Chardonnay is still the number-one wine in the world, and especially when you get up into Sonoma and Napa counties, you’re seeing a little bit more demand. We’ve seen some real softening on Cabernet, however. I would say the biggest place where it’s the toughest right now, is Paso Robles. There are roughly 30,000 to 35,000 new tons of Cabernet in Paso Robles, since 2013-14. That’s a lot of fruit.
Q: Is there a good side to the oversupply situation?
Ledbetter: I think you’re going to see a lot of opportunistic brands do very, very well right now, because they’re going to have the opportunity to buy fruit in a softer market, and you’ll get new brands that then go crazy and they do very, very well. It brings that soft market back into a normal market. And, that’s a good thing. Charles Shaw, the Two Buck Chuck wine of the early 2000s, taught people how to buy a case of wine versus a bottle of wine, and so something like that’s going to pop up again.
Q: Do the escalating land valuations in top regions keep a wine-grape grower from making a profit?
Ledbetter: The crazy part about it is, if you run the numbers — what it costs to put my vineyard in, how many years do I have to farm it before I’m going to get a crop, and then my contracting price — it all seems to calculate and work. Can it create a 10% return? In both Napa and Sonoma counties, we’ve been able to continue to do that.
Q: The Trump administration has rolled back the Obama-era “Waters of the United States” rules that gave the federal government more authority over waterways on private land. How important is this to grape growers?
Ledbetter: It’s significant because it was a very broad statement of what the waters of the U.S. were. If I have a ditch on my property that has been created by standing water and I need to pump that out so I can get to the other side of my field, I need a permit to do that. That’s not constructive to everyday work. That was done by the federal government. What happens with our California government is, they write laws or regulations and they have nobody to oversee them, so it just totally killed business. We’re over regulated without having somebody on the ground to help us through it.
I think you’re going to see a lot of opportunistic brands do very, very well right now, because they’re going to have the opportunity to buy fruit in a softer market, and you’ll get new brands that then go crazy and they do very, very well.
Q: What would help agriculture have better water security?
Ledbetter: When agriculture fails to market what they’ve done over the years, then use of water is an issue. And, that’s what we in agriculture always do. For the most part, we make the right choices and move to do things better because without land and without sustainability, we don’t have a job. So probably 99% of us understand that our ground and our vineyards and our property is our livelihood. We’re not going to do anything to risk that.
We don’t go out there to pollute just to pollute. No one’s doing that. But, that’s the reputation that we get. On the water side, we went from furrow irrigation to sprinkler irrigation, to drip irrigation, both underground and above ground. We’ve conserved so much water, but we’ve never gone out and marketed that and said, “Hey, look at how much water we’ve saved over the years.”
But the biggest issue is the unwillingness of the environmental groups to allow reservoirs to be built. There has been really no major infrastructure upgrade in the state of California since the 1960s, and when you have 25 million people living south of The Grapevine, in a desert, there’s our problem.
Q: Why has Vino Farms emphasized certified sustainable practices?
Ledbetter: Obviously, the environment’s very important. All of the vineyards we farm are part of a sustainable program, the largest one being third-party-certified Lodi Rules, and it was the first. SIP is also a third-party-certified program we use. Water is a piece of that, obviously financial sustainability is a piece of that. The environment is a piece of that, and our people are a piece of that. And, creating the best work environment for our employees is also something that’s important to us and my family.
— Jim Gordon
Wine in Heavyweight Fight for Sales
Napa, Calif.—The sharks are circling, and wine marketers better get ready for what could feel like a death match to retain or grow market share.
In stark language, several of the wine industry’s leading experts said wine needs to be more aggressive in connecting with all consumers or it could see its current, modest growth turn into a sales slump.
Even among wine drinkers, wine could revert to being saved for “special occasions” a place it has fought for years to leave. From innovation in both beverage alcohol and non-alcoholic beverages, to changing attitudes on alcohol the landscape is more competitive than it has been in decades.
All of the new challenges as well as opportunities facing wine were discussed at the Wine Market Council (WMC) membership meeting held May 9 in Napa.
WMC board member Danny Brager, senior vice president of Nielsen’s Beverage Alcohol group, said wine is seeing a trend of “deaccelerating growth” despite year-to-year increases in sales value. Premiumization continues but at a slower rate. Sales of wines priced $15 to $20 have dropped by about four percentage points in the past four years and $8 to $11 wines, which were up 4% in 2014, are down 2% in the last 13 weeks. “That’s been a pretty significant change,” he said.
He cited recent polls by The Harris Poll that found 66% of consumers 21-34 were making a strong to moderate effort to reduce their consumption of alcohol. Shoppers between the ages of 21 and 34 also account for just 20% of total wine sales volume while those older than 65 account for more than 25% total volume and are nearly a quarter of all wine buyers.
The reasons for this are the health concerns of more mindful consumers as well as a much more competitive market. Products that didn’t even exist within the past five years are now a growing threat to wine sales. Hard seltzers have gone from essentially nothing to $1.2 billion in 2014 and nearly $3 billion today. The new beverage accounts for about 2% of the entire beer market. Hard kombucha has leaped out to about $553 million a year at a 36% annual growth rate.
Brager suggested those in the audience take a stroll through the non-alcoholic beverages aisle to see a plethora of new and innovative products many of which are being marketed as beverage alcohol. “Trust me, there are a bunch of sharks out there just waiting to steal business from the wine business,” he said. “Who is your competitor? It’s not just another wine brand but beer and spirits and we have non-alcoholic beverage companies coming at us too.”
“Trust me, there are a bunch of sharks out there just waiting to steal business from the wine business.” — Danny Brager, Nielsen
In light of slowing sales, much has been made of the millennial generation and their purported lack of engagement with wine.
Jon Moramarco, founder of the consultancy and market research firm bw166 and managing partner and editor of the Gomberg Fredrikson report, said millennials range in age from 25 to 42 and is one of the most diverse generations in America’s history. He said it doesn’t make much sense to consider them as a single, cohesive marketing target. “To say we’re going to target millennials, I think that is worse than saying hope is your strategy. It’s not going to work,” he said.
Waiting for the next generation of wine drinkers
Even the oldest millennials have not reached the point in their lives of peak purchasing power. Moramarco tracked the average age of the Boomer generation, which is credited with the robust wine sales of the last 30 years. In 1976, the average boomer was just entering the adult world. By 1986 they reached the period of transition into 30s, and they didn’t enter middle adulthood until 2003. Comparing that progression to the growth of wine sales, it’s easy to see the impact of Boomers. “Baby boomers drove the boom,” he said.
If one were to do the same to millennials, the industry has to wait until 2023 when the generation’s average age is 37, or when the Boomers saw the 60 Minutes episode on the “French paradox.” Younger consumers do drink wine, Moramarco said they just need to reach a point in their lives when they can afford to. “My kids drink wine like I do,” Moramarco said, “when they come to my house and I’m buying.”
“My kids drink wine like I do, when they come to my house and I’m buying.” — Jon Moramarco, bw166
He said the hard seltzers of today are the wine coolers of the 1980s and so while it may seem as if the market has entered a new and uncertain period that’s not the case. The number of drinkers in the U.S. and how much they drink is fairly static. Moramorco said the beverage alcohol industry remains in a fight over the same group of consumers. “I don’t think you’re going to see people drink more. It’s a share fight,” he said. “You’re going to have to put on the boxing gloves and it times it’s going to feel like a fight to the death.”
In the coming battle, the wine industry may have to fight to claw back territory it had once gained in consumer perception. Christian Miller owner of Full Glass Research and the WMC’s research advisor, said based on surveys by the WMC wine has lost some ground in the fight to be an everyday beverage in the eyes of the consumer.
Of consumers between the ages of 21 and 29 (41% of who use cannabis) wine loses out to beer, spirits or non-alcoholic beverages for most occasions such as a “casual dinner out with friends” and only has a clear preference among the majority of consumers for a “romantic evening” or “dinner at a fine restaurant.”
And when asked if they agree if they prefer wine over other alcoholic beverages, only 40% of young consumers reported they did which is the same level as 2000. But in 2010, nearly 60% of young consumers reported a preference for wine. In 2010 only 41% of consumers said the preferred other alcoholic beverages to wine and that has since increased to 60%. “Wine is drifting back to where it started in the ‘90s as kind of a special-occasion beverage,” Miller said.
When asked about drinking more, less or “no wine” compared to a couple of years ago, 11% of young consumers said they were drinking less wine and 31% said drinking less alcohol overall.
‘The sky is not falling’
Barkley Stuart, executive vice president of Southern Glazer’s Wine & Spirits said it does seem as if the wine industry is facing unprecedented change but such a period also offers new opportunities. “I think we need some perspective to realize the sky is not falling,” he said. “We can navigate these changes.”
He said because of the three tier system, the U.S. is home to the world’s safest and most secure beverage alcohol market with little of the counterfeiting, refilling and tampering issues seen in other nations.
Stuart said cannabis can be seen as a looming threat, but the effects of legal cannabis are unclear. Based on Southern’s internal data, cannabis has not had an impact on wine sales, but the industry does need distribution system if it were to be legalized at the federal level. In 2018, the Wine & Spirits Wholesalers of America, WSWA, endorsed legalizing cannabis if there was a distribution system in place similar to that for wine.
Consumers will continue to make more wine purchases online, which is why WSWA has an equity stake in the delivery app drizly, which is active in 130 markets with 1,300 retail partnerships expected to grow by 2,500 by the end of the year. “We need to meet consumers where they are shopping,” he said.
The WSWA is also launching Sipsource, which is a new data service to provide the industry accurate figures on wholesale depletions.
— Andrew Adams
Higher Costs and Fewer Buyers
Napa, Calif.— While 2018 saw bountiful yields up and down the state, not all of those grapes drew the attention of buyers. As prices have stayed flat or softened, labor costs continue to rise as does the number of new laws and regulations pertaining to agriculture.
Even if one does have contracts, wineries are eager to renegotiate — but not to pay more to secure supply — to drop prices with the enticement of a longer contract.
There was plenty to discuss at the recent Vineyard Economic Symposium hosted in Napa by Wine Business Monthly. The event is in its 24th year and drew 40% more attendees than the previous year. Organizers said the event typically draws a larger crowd when the market is uncertain, and several of those at the show could be heard saying they had never seen such a sluggish market for grapes or wine.
Since the early ‘90s the industry has enjoyed steady, overall growth year to year. In recent years, that growth has slowed — an upward curve has flattened. “It’s not necessary a crop issue,” said Glenn Proctor during his remarks on the current market. “That flattening out is kind of a concern in the industry going forward, at least it’s raised questions that are hard to answer.”
Proctor, who is a partner and broker with the Ciatti Company wine and grape brokerage in Novato, Calif., said the ideal solution would be for wineries to sell the industry out of the current excess supply but with more than 8 million gallons of bulk Cabernet Sauvignon on the market, and about 5 million of that from coastal regions, it’s a tall order.
Of Ciatti’s grape-buying clients, Proctor said a survey found 70% plan to “adjust” sourcing, 70% said they will cancel some contracts and 45% plan to renegotiate. Proctor said current renegotiations typically are along the lines of buyers asking for a $500 decrease in per-ton prices but then extending the contract by a couple of years.
‘First offer is the best offer’
He said “sometimes the first offer is the best offer” and urged the audience to strengthen their relationships with current buyers and manage inputs and assets to protect profits as well as develop long- and short-term strategies. “Your strategy can’t be hope,” he said. “Your strategy has to be based on real information and market conditions.”
Lise Asimont, director of operations for Cakebread Cellars in Napa Valley, opened the event by presenting highlights from the 2019 industry survey in which 60% of the participants were growers and 35% were with wineries that owned vineyards. About 40% of the participants were in Napa or Sonoma counties but 15% were in Oregon and 17% in the Central Coast of California. Asimont said 77% of those surveyed said they were not developing new acreage and 48% said grape prices were their top concern followed by 42% who were most concerned by new regulations.
Mechanization remains a priority with most saying they expected to invest heavily in this area as the ongoing labor shortage is considered the most negative impact on their business. Despite concerns about labor, 95% of those surveyed said they were not taking advantage of the federal H2H guest worker program.
When asked about length of contracts, 62% of those surveyed said they had long-term agreements of three to five years, about half said they had short-term contracts and 47% reported they also sold on the spot market.
Mitigating risks and smoke
As the industry prepares to deal with a glut of grapes in a slowing market, a panel also discussed the biggest grape quality issue of the past two vintages: smoke contamination.
Doug Wilson, vice president of winery and bulk sales for Silverado Investment Management Company, moderated the panel that included Jeff Richardson, chief operating officer of CK Mondavi and Family; Ryan Stapleton, director of grower relations for Coppola Family Wine and Matt Heil, director of supply for Copper Cane Wine & Provisions.
Copper Cane produces several wines with grapes from Southern Oregon and Heil said in 2018 the region saw 160 fires from lightning strikes in and near the Illinois, Applegate and Rogue valleys that eventually spread to cover an area similar in size to about a quarter of the entire state of Delaware.
Heil said the company worked with 20 growers on sampling from late July to August and sent samples to two labs in California as well as the Australia Wine Research Institute.
Ultimately, in a move that was widely reported in Oregon and elsewhere and for which Copper Cane received a raft of criticism, the company had to reject more than 2,000 tons of grapes. Only five of the 20 growers affected had crop insurance.
Heil said in addition to adding in contract clauses about grape quality, Copper Cane is also proposing to share half of the premium costs for crop insurance. “We are currently working on a clause to roll out with growers,” Heil said. “The feedback we’ve received from our growers has been welcome.”
When asked about “fixing” smoke taint, Stapleton said what he’s done is essentially treat affected red grapes like rosé. The clusters are pressed as soon as possible and then the juice is either added to fermented skins of the same variety or something with a bit more color such as Petit Sirah. “Otherwise that’s where we still need some research,” he said.
Flash détente can be a challenge to schedule while reverse osmosis, enzymes and other additions have not been wholly successful. “I don’t know if any of those are a silver bullet,” he said.
Richardson said CK Mondavi is considering a quality clause of 2 parts per billion for smoke taint indicator compounds as well as a crop insurance requirement. The other panelists, however, said they still can’t pick on a number as sensory testing doesn’t always match with the amounts of indicator compounds in the wine and what tastes OK in the barrel can often become much worse in bottle.
In terms of 2019, Heil said luxury sales are still strong so Copper Cane is looking for more Pinot Noir in Oregon and California but is being “very, very careful.” Richardson said CK Mondavi’s tanks are still full and they don’t expect to see sales grow much so they’re looking to “right size operations” after waiting on bloom and set. Stapleton said Coppola is no longer offering planting contracts and any new contracts are mainly for “obscure” varieties such as Grenache and Grenache blanc to provide diversity and unique options in direct-to-consumer programs.
Industry News and Upcoming Events
Hanson to oversee wine at Constellation
Robert Hanson is the new executive vice president and president of wine and spirits at Constellation Brands, Inc., in Victor, N.Y. Hanson previously served as a member of Constellation’s board of directors from 2013 to 2019 and resigned his board seat prior to his acceptance of his new role with the company, according to a press release by Constellation. Hanson will officially assume his new role on June 3. “Robert’s strategic orientation, brand-building abilities in high-end segments, understanding of global operations, and leadership capabilities have been a huge benefit to our board of directors over the past six years,” said Bill Newlands, president and CEO in the release.
Hanson brings consumer product goods and senior management experience to this role, having served as CEO at John Hardy Global Limited, a leading global luxury jewelry brand, where he will continue to serve as the company’s board chair. Prior to joining John Hardy, Hanson also served as CEO at American Eagle Outfitters and global brand president at Levi Strauss & Co.
New CMO at Ste. Michelle
Francis Perrin is the new chief marketing officer of Ste. Michelle Wine Estates in Woodinville, Wash., and will oversee brand management, digital marketing, innovation and direct-to-consumer functions. Most recently, Perrin was the chief marketing officer at Bel Brands USA, the U.S. subsidiary of Bel Group, which is the world’s third-largest cheese company and, prior to that position, he worked in marketing for Procter & Gamble, L’Oréal and Pernod Ricard.
Plata hires VP of sales and marketing
Plata Wine Partners in Napa, Calif., announced Aaron Fein is the company’s new vice president of sales and marketing. Fein will be focused on the development, execution and management of major retailer programs both on and off premise. Fein began his career with Barefoot Wines and Bubbly and as national sales director helped grow the brand to 800,000 cases prior to its sale to E. & J. Gallo Winery. Fein held similar roles at Constellation Brands, Jackson Family Wines, Purple Wine Company and Banfi Vintners and was most recently with Vinventions LLC.
Round Pond appoints new winemaker
John Donegon Wilson is the new winemaker at Round Pond Estate in Napa Valley. Wilson is a graduate of the University of Colorado, Boulder, and most recently was the winemaker at Vine Cliff Winery. He has worked with Thomas Rivers Brown and held winemaking roles at Thomas George Estates, Littorai Wines in Sonoma County and Rivers-Marie and Outpost Wines in Napa County.
Lohr promotes red winemaker
Lohr Vineyards & Wines announced the promotion of Brenden Wood from assistant winemaker to red winemaker. Wood replaces Steve Peck who has been promoted to the director of winemaking in 2018. Wood will be responsible for all tiers of red wine production in the family-owned-and-operated winery’s portfolio and will continue to work alongside the winemaking leadership group that includes winemaker of white wines Kristen Barnhisel, production winemaker Karl Antink, and president and COO Jeff Meier.
Richmond named Napa grower of the year
At the Napa Valley Grapegrowers’ 44th annual dinner on May 13, longtime Napa Valley farmer Pete Richmond was honored as the 2019 recipient of the Napa Valley Grower of the Year award. Richmond was honored for his contributions to Napa Valley agriculture and to the grape grower and farmworker communities. In 2001, Richmond founded Silverado Farming Company, which he currently owns and operates. Richmond implemented “1% for the Community,” a program that donates 1% of Silverado Farming’s gross profits to fund initiatives supporting at-risk youth and agricultural workers.
Innovation + Quality
A one-of-a-kind forum for ultra-premium wineries focused on innovations that advance wine quality. This event is produced by Wine Business Monthly, in partnership with Napa Valley Vintners and the Napa County Farm Bureau. May 22-23 at the Silverado Resort & Spa in Napa, Calif. winebusinessiq.com
2019 ShipCompliant Wine Summit
ShipCompliant customers, partners, and industry experts will converge upon wine country for the 14th annual ShipCompliant Wine Summit featuring keynotes, content-filled general sessions, specialized break-out sessions, and exhibition hall. May 29 at the Napa Valley Marriott Hotel & Spa in Napa, Calif. http://sovosgcs.com/shipcompliant-wine-summit/
Lodi Vineyard & Winery Economics Symposium
The economic and financial conference for growers and wineries in Lodi and surrounding regions. June 26 at the Wine & Roses Hotel in Lodi, Calif. lodiwinesymposium.com
Wine Packaging Conference
The sixth annual Wines & Vines Packaging Conference taking place Aug 8, 2019, at Lincoln Theater in Yountville, Calif. The conference sessions, exhibits and amenities are designed for winemakers, winery operations managers, purchasing managers, wine marketers and other industry professionals. www.wvpack.com