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State of the wine industry

Despite the positive spin provided in the State of the Industry report, there are growing signs that the U.S. wine industry has some emerging fissures.

America (Country Appellation)

State of the Industry: Myth Amid Optimism

by Dan Berger
February 11, 2008

DropCap F rom the optimism I heard at the recent Unified Wine and Grape Symposium held in Sacramento, CA in late January, I might have thought the California wine industry was out dancing in the streets. But if you looked at the crucial Wednesday morning State of the Industry session through an electron microscope, you might have a radically differing opinion: that the American wine industry is in a sad state.

While all the signs were there that a major implosion is imminent, the pundits and the analysts seem curiously, blithely unaware that the skies are cloudy indeed.

Some of the signs came from what speakers at a significant opening-day symposium didn’t say, and those omissions were verified by casual chats I had with key marketing people (none of whom wish to be named for obvious reasons). The only question I can’t answer is this: Is the health of the U.S. wine industry in serious condition or ought it to be reassessed as in critical condition?

To be sure, the hall at the Hyatt Regency Ballroom was filled nearly full with optimistic faces last Wednesday, and a lot of what was said indicated positive trends in the U.S. wine game. (The operative word here is 'indicated'.)

dollar-down.jpgTed Baseler, president of highly successful Chateau. Ste. Michelle, pointed to the fact that nationwide sales of Riesling were up 24 percent last year, Pinot Noir sales rose 27 percent and Pinot Gris was up 15 percent. And sales of all Washington wine rose 22.2 percent. Moreover, sales of Australian wine were up only a small amount after a decade of double-digit increases.

Oh, there was one small negative. Sales of New Zealand wines rose 37 percent and sales of Spanish wines were up 20 percent but U.S. wine sales were rising; and wasn’t that all good news?

Then came Josh Greene from Wine & Spirits Magazine, to speak of the top brands in U.S. restaurants. After a peak in 1994 when Chardonnay led U.S. restaurant wine sales (more than a third of all wine sold), that grape has declined every year since - but that’s okay since it only means that the white wine category is now more diverse, with restaurant goers now happy with a wider selection of wines.

Good news? Well, looking at the numbers you’re not quite sure, since 30 percent of all restaurant wine sales are evenly divided between French and Italian wine.
31 percent of all wine sold in the United States last year was imported wine - an all-time record. In 1986-87, imports reached nearly 1 bottle in 4, and if the current trend continues, it’ll soon be 1 bottle in 3.
That’s not insignificant. Then Nat DiBuduo, president of Allied Grape Growers, displayed a plethora of charts showing where various varieties were growing, and that quality was up across the board for the last few years.

And Glenn Proctor of The Ciatti Company, the world’s largest bulk wine brokerage, affirmed that business was good. (Of course, if Ciatti has a lot of wine to sell, then business would be good. But doesn’t that mean that a lot of wine is selling in bulk, which is a secondary market for some growers? Wouldn’t that wine be worth more if sold to a prime market, direct to consumers without going through the bulk market?)

And last, but certainly not least, came the man we all love to hear, the estimable Jon Fredrickson, who gave a glowing report on the success of some 30 brands whose sales were all up last year. Fredrickson is a skilled professional, and his reports always contain important data about how California is doing. And one fact he delivered was the worst news of all: that 31 percent of all wine sold in the United States last year was imported wine. This, in case you aren’t aware of it, is an all-time record. In 1986-87, imports reached nearly 1 bottle in 4, and if the current trend continues, it’ll soon be 1 bottle in 3.

You’d Think Pollyanna Was In Charge Of The Wine Industry

Still, optimism reigned: this conference was expanded a day into a four-day event; a record 11,000+ attended. Exhibits at the adjacent trade show hall also rose 5 percent to 524 this year - and at least 100 trade suppliers had to be turned away because of a lack of space at the huge Sacramento Convention Center.

The reports at the primary session included some news worth looking at. DiBuduo said that over the last decade, some 125,000 acres of wine grapes were removed from California’s Central Valley vineyards. He added that total Central Valley acreage now represents just over 50 percent of the state’s total wine grape acreage.

But is this a good thing? He suggested that the time may be very near when new Central Valley acreage should be planted – but, he cautioned, only for those with solid winery contracts. The key to why is simply the consolidation in the wine industry. With Gallo, Constellation, Diageo, and Fosters now controlling a larger share of all wine production and sales than ever before, the consumers’ options have shrunk. The majors now call the shots in ways they didn’t until just recently.

DiBuduo pointed out that 79 percent of all wine sales were in bottles selling for $10 and less. Does this sound like nearly half of all grape acreage in California is planted in coastal regions, which are more costly to farm?

You can do the math, but if 55 percent of the acreage is located in the Central Valley and 80 percent of the wine is selling for less than $10 a bottle, and still imports are rising steadily, what does this say about the consumer’s attitude toward domestic wine?

DiBuduo admitted that the state’s sliding share of U.S. wine sales is a problem, and then he unaccountably said, “I think the pendulum is swinging back, and wineries now want our grapes.”

The Aussie Attack and How U.S. Exports Backfire

Were that true, how is it possible that not a single word was heard from anyone about the new Regional Heroes campaign that the Australian government has launched to boost sales in the United States. A week before this conference, I met with Paul Henry, Wine Australia’s general manager for market development,
”The Aussies have it right. We have to recognize our smaller regions. If we don’t stop [expletive] around with the ‘California’ designation and prove our $10 wines have value added by using smaller appellations on them, we will lose all those millennials.
who laid out a carefully designed plan to kick up Australia’s position in the U.S. market, backed by Aussie government funding. Moreover, an Internet search revealed that in 2006 the United States spent $2 million on research intended to improve wine quality. Australia spent $25.3 million.

One wine marketer told me, “The Aussies have it right. We have to recognize our smaller regions. If we don’t stop [expletive] around with the ‘California’ designation and prove our $10 wines have value added by using smaller appellations on them, we will lose all those millennials. They are getting pretty smart about this, you know.”

Fredrickson, publisher of the respected Gomberg Fredrickson Report, showed graphs and tables proving

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Reader Feedback

Reader Comments... [14]

Greg Brown , owner/winemaker
T-Vine Cellars, Calistoga, CA
Wow, it's amazing to me how some within the industry seem to do their best to find a negative spin. There are always challenges, there are always opportunities... For the record T-Vine has had the best Jan/Feb in our 17 year history and I’m incredibly grateful and pleased to spread some good news. It seems we're addicted to the negative and believe me I’m a realist but I also believe in manifestation and focus. So give me the positive, celebrate our accomplishments, rejoice in the fact we're in such an amazing industry where if all else fails we can consume our art and slow down our lives a bit.
Greg Brown, T-Vine Cellars

Nathan R. Carlson , Winemaker
Tolosa Estate / Courtside Cellars, Edna Valley AVA, CA
A well-thought out piece; and probably good to have a dose of realism against the over-enthusiastic mood that dominated the Symposium.

One point that you make is that Ciatti says that the bulk market for wine is improving - brisker sales at higher dollar prices. This IS reason for real optimism among grape growers. There were plenty of growers who have had no choice but to sell their bulk wines at a loss, or leave grapes on the vines after the monumental 2005 vintage overloaded the bulk market. Now that wineries have built programs to utilize those supplies, buyers are back in the market, shopping for wines, lifting the prices to at least marginally sustainable levels - as the supply dwindles, these wineries will be shopping for grapes, setting up new contracts that growers depend upon to continue farming. This is good news.

Regarding Italy and Spain - these have been hot areas to source bulk wines and fruit - but even this past year a large Italian cooperative stopped selling their grower's Pinot Grigio to a large US company, in order to start bottling and shipping their own wine mostly within Europe. Wines that were imported into the market last year, with a lower Euro, will likely have to raise their prices (at least in dollars, landed in the US) drastically - I think that the $6 Italian wine will soon be an $8-9 wine here, and these lower price points are very sensitive to increase. That could have enormous effect, creating opportunities for US companies. For the same reason, Spain will probably continue to figure in the US market, and even gain share, but it will be for quality wines from the enormous stock of old-vines; Spain probably cannot become the 'New Australia' as some have suggested it might.

I am not surprised at the 30% market share of foreign wines in the US, and even as a domestic wine producer, I welcome it. The wine drinker in the United States is incredibly promiscuous; it drives wine marketing people crazy! There is a level of curiosity and sense of adventure here that drives demand for wines (and all other consumer products) from all over the world. People want to learn about wines, taste wines from places that they have visited, and try the 'hot new thing.' European consumers in very general terms, see wine as simply a beverage, and are incredibly price-conscious (although that is starting to change). I believe that with such a curious, engaged consumer base right here in our back yard; with the US really starting to show signs of making wine a part of their every-day life; with the elevated Euro making visits to Napa, Oregon, and the Central Coast much more viable than Tuscany; there are a lot of opportunities for domestic wine companies that are willing to present their customers with value, quality, and authentic products. I am overall pretty optimistic about the near future - we can compete on quality with anyone in the world, and United States consumers are as interested in quality and authenticity as their counterparts anywhere else in the world.

Marc Goldberg , Owner/Winemaker
Windward Vineyard, Paso Robles, CA
Dan Berger, as he usually does, provides a different and unique perspective of the changing wine market; from the Regional Diversity of the traditional market to the Global Mediocrity of cheap but non-distinctive yet drinkable modern wine that is now available. Ten years ago I was hard put to find a wine that I could drink, let alone enjoy, from many of these new players. Now with the advent of the "Scientific Winemaker" and the application of modern winemaking techniques they are suddenly "drinkable" and thanks to the ethanol "buzzable" quaffs. But will the world turn their back on traditionally made wines from areas of Regional Diversity? I don't think so. The small and unique producers who make a wine that's mainly about the varietal and the geography in which it is planted can sit on the sidelines and watch the "Wooly Mastodons" battle to their inevitable extinction and still remain viable producers of their unique products based upon the thousands of years of evolution of the traditional winemaking philosophy. Bonaparte knew what he was doing when selecting the Chambertin with yellow seal to drink alongside his Bouillabaisse. I still make the same selection.

Thanks to Dan for his insights into the changing marketplace of the Global Wine Industry.

Steve Krohn , Owner
New England Wine School, Rhode Island
Thanks for the enlightening article. We often get the question from our students or tourists at the winery I work at (Newport Vineyards): ”How come these foreign wines are so much cheaper than the local or California wines?” We explain that the major cost of a finished bottle is the land and labor, which gives other countries the advantage over the US, with the one exception being the Central Valley in CA.

John , Manager
Terre Beau Vineyards, Dover, MO
Interesting article, I appreciate your effort.

Jean-Pierre Wolff , Owner & Vintner
Wolff Vineyards, Edna Valley, CA
Sorry Dan, I think that your glass is half empty and mine is half full! The global wine industry is indeed complex; yes, two experts (particularly economists) side-by-side will argue on what is wrong and what is good in this business. If we have flaws and fissures in California, don't you think that the rest of the world has them too?

Rich Smith , President
Valley Farm Management, Monterey, CA
The 'report of my death' is greatly exaggerated. California growers and wineries do not have a 'wine industry' any more than restaurants have a 'dining industry'. Certainly there are factors that have broad consequences for either (or both) of these so-called industries (i.e. the economy). But most participants in both of these businesses continue to operate successfully. This is true in spite of well-deserved negative criticism of marginal players in both of these business categories. Spot market sales and bulk wine sales are not the majority of business transactions in our grape-wine world. There are certainly more long-term relationships and contracts that reflect a win-win approach where growers and wineries cooperate to take advantage of the opportunities in the market. We also suffer from the same weak moments. I am concerned when we talk about the weak segments or situations in our business as if they were typical that we will initiate a 'self-fulfilling-prophesy' that tells consumers and industry growers and vintners what they should think, instead of what they could think. If as a result we successfully diminish the enthusiastic planting of appropriate grapes in appropriate areas, then we will definitely have to have more imports to fill the increasing demand by the American public for new and interesting and affordable products. Read between the lines. As John Fredrickson said in Sacramento, "there is an explosion of wine sales". The California industry can celebrate right along side of our foreign competitors (who are substantially our American/multi-national corporations filling as many niches as they can). Things can always be better, but we have to do our part to prepare for any future success. I am preparing!
~ Rich

Bruce H. Rector , co-owner
Ahh Winery, Sonoma, CA
Hey Dan!
Isn't it wonderful how competition concentrates the mind? And as your article points out, now we can all get thinking... Your writing begs the question: Who are we? Who am I? And how can I make a buck being me, doing what I love to do? I hope everyone wraps their mind around that one and not the 'numbers'. I have thought about the question, and I went from making 4 million cases 15 years ago to making 10 barrels. Both things were/are exciting, but the 10 barrels I really know. And I meet people all the time that want to know them too. The most significant trend afoot is that people really want to know. The statement "that imports are here to stay" is wonderful news for small US producers. Why? Because the imports are increasing most where there are distinctive wines being made. This is solid cause for optimism. So how do you make a buck? Be you, be distinctive, but don't believe your own B.S. Believe what the eyebrows of your customers tell you. If they pull together, you are in a blind alley. If they go up, you can too.
I send a bunch of my best,
Bruce H. Rector,
Ahh Winery

Michael Zitzlaff , Chief Winemaker
Crushpad, San Francisco, CA
Great article Dan,
Having been in the Californian wine industry on and off for the past 3 years I am not surprised that my home country [Australia] has done so well in the US, when you factor together low unit cost supported by relatively favorable exchange rates, fruit oversupply irrespective of what the 2024 report stated, and federal and industry investment into technical (AWRI) and export (AWBC, AWEC) bureaus some 30 years ago - paid for by crush levies from the industry for the industry. Along with this add the magnificent appointments of extraordinary export promotional staff (Jan Stuebing in US and Hazel Murphy in the UK to name a few), plus the Australian Government’s Export Market Development Grant scheme, and you have the recipe for a unified "Brand Australia" invasion. I am constantly amazed at the industry fragmentation that exists within the US market, reminiscent of structures in a similar country like South Africa. For such an intellectually advanced consumer country it is fascinating how slow industry reaction is to changing trends both nationally and internationally. But all the same, I still love the "can do" environment that exists in this country when compared to other international producers.

William Hatcher , CEO
A to Z Wineworks, Dundee, OR
While I have been something of a Cassandra here for a couple of years now and certainly agree with the tenor of Dan's report, the Central Valley / Coastal comparison may be a bit specious in that acreage is being compared rather than the overall yields from that acreage.

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