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Wine Supply Is All About Control

Rabobank experts urge wineries to secure control of grape and wine supplies

by Andrew Adams
Napa, Calif.—If the market in the past decade rewarded nimble wine companies finding the best deals for grapes and bulk wine by playing the spot market, successful wineries in coming years will be the ones who control their supply chain.

That’s the message from industry analysts with Rabobank, who see global wine production continuing to decline and domestic consumption outstripping domestic production, leading to intense supply pressure in coming years.

Despite the large 2012 crop, Rabobank’s analysts see “structural limitations” to match the U.S. and the world’s growing thirst for wine with the available grape supply.

Wine companies that fail to secure their sources of supply “will face increasing challenges to grow their brands over the long term,” concluded the report by Stephen Rannekleiv, the executive director of the bank’s food and agribusiness research and advisory group.

Rannekleiv said it’s no longer about finding the right product at the right time. He said it’s more important to have control over your source of supply. “This is something we’re seeing across the food and ag chain,” he said.

During a session at the Silverado Country Club in Napa Valley, Rannekleiv and Vernon Crowder, a senior vice president and agricultural economist based in Fresno, Calif., discussed sourcing strategies with a group of winemakers, winery owners and other industry clients.

One bit of good news delivered by the pair is that they expect the U.S. economic recovery to accelerate later this year. They peg U.S. wine consumption to follow GDP growth at around 2.5% a year. “We seem to be recovering quite nicely,” Rannekleiv said.

Crowder said there’s little land available for more planting in California’s North Coast, and land in the Central Valley continues to grow more expensive. He said an acre of good land with water now costs between $12,000 and $15,000. Central Valley grape prices have soared in recent years, with Fresno County grapes prices growing by more than 200% and Madera County grapes by more than 150%. Grape prices in Napa and Sonoma counties have grown by less than 50%.

Sourcing options
Wineries should buy vineyards, consider new partners for grape contracts and ensure they’re making the most efficient use of available resources.

The growing demand for wine has kept vineyard land prices high. Buying property, however, locks in the source of grape supply for a winery and denies it from a competitor. “One option is just to bite the bullet and pay the higher prices out there,” Rannekleiv said.

That could mean purchasing property outside of regions where a company has traditionally found grapes. Rannekleiv pointed to acquisitions in the Pacific Northwest by big-name wineries in California. Washington has significant potential as a place to source wine grapes, but Rannekleiv said he doesn’t see other grape-producing states in the United States like Michigan, Virginia or Texas as being significant sources of U.S. wine supply.

Another option could be buying vineyards oversees.

Buying property in Chile, for example, could be a bold step to ensure the supply of U.S. brands, and the property could serve as a platform to launch brands into other Latin American markets such as Brazil and Mexico. An Argentinean acquisition could provide an especially competitive supply source if the country undergoes an expected devaluation of its peso.

Finding partnerships
Foreign expansion likely would pose too many risk and challenges for most U.S. wine companies, Rannekleiv said, leading wine companies instead to evaluate alternative partners for planting contracts.

Strong demand for almonds has in turn made grapes and land in California’s San Joaquin Valley more expensive. Almond growers have shown some interest in diversifying with wine grapes as a hedge against any drop in nut prices. Grapes are profitable and require less water than almonds. Investment firms continue to eye vineyards because of the potential for steady and growing returns. High land prices could present a challenge to moving forward with either type of partnership. “They still need to make it pencil out,” he said. “This is not a catch-all solution by any sense.”

Long-term contracts with bulk suppliers could be another option. Instead of playing the spot market, Rannekleiv suggested wine companies seek long-term contracts with foreign producers to control a segment of their supply. “A dedicated partnership with a foreign winery can lend a sense of place and history to a brand that can be difficult to replicate, and gives the supplier a vested interest in assuring quality,” Rannekleiv wrote.

Rannekleiv also noted that it appears many Napa and Sonoma wines are “under valued.” In his report, he states the average per-ton prices for Napa and Sonoma grapes ($3,578 and $2,181,) respectively) should yield wines priced between $22 and $36 on average. According to data from The Nielsen Co., however, most wines are selling for $15-$20. “This would indicate that a significant portion of high-value grapes are being under-utilized in lower priced brands that are not maximizing potential profits,” he told Wines & Vines.

Companies producing brands that sell for less than $20 will be under the greatest pressure to source from other California appellations or raise prices. Producers who sell wine for less than $20 because they own vineyards also will have to confront a growing opportunity cost. “The higher the price of grapes go, the higher that opportunity cost is,” he said.

In an email to Wines & Vines, Rannekleiv said it appeared wineries were set to bump retail prices near the end of 2012 but backed up due to dampened consumer confidence. That may not be the case near the end of 2013 and 2014. “Obviously the industry needs to try to pass through prices increases to offset the rise in grape costs,” Rannekleiv sai d.

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