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01.29.2014  
 

Wine Economy to Improve This Year

Good supply and growing demand well-timed for U.S. wineries

 
by Andrew Adams, Jim Gordon and Kate Lavin
 
 
California wine production
 
Source: Allied Grape Growers.
Sacramento, Calif.—The stage is set for the U.S. wine industry to enjoy a better year in 2014 than it did in the slow-growth year of 2013, according to a panel of industry analysts who addressed the Western Hemisphere’s largest audience of winemakers and grapegrowers Wednesday at the Unified Wine & Grape Symposium.

In a session titled “State of the Industry,” they concluded that a healthy supply of U.S. wine is now in balance with steadily growing demand from American consumers. The phrase “it’s complicated” punctuated their remarks, however, as they sized up the status of global supply and demand. The complications include drought in California, competition from imports and competition from craft beer and cocktails.

The remarks came on the first morning of the 20-year-old, three-day conference and trade show that reported total registration of 13,000 participants and 650 exhibitors.

The great global wine panic
Wine economist Mike Veseth drew parallels between Orson Welles’ “War of the Worlds” broadcast and an October 2013 report warning of imminent wine shortage.

As with the Orwellian radio stunt of 1938, the report published by the Australian research arm of Morgan Stanley quickly set in motion a public frenzy, with international news outlets printing headlines decrying “Global Wine Shortage Looms” (Fox News), “Is China Causing a Global Wine Shortage?” (CNBC) and “Has Our Worldwide Barrel Run Dry?” (International Business Times).

In the weeks following the report, businesses theorized about how to monetize the rumored wine shortage.

“The people in the fine wine auction business said, ‘Well, if the world is truly running out of wine, maybe you should buy Bordeaux futures.’ Everyone tried to sell their own businesses. Some people tried to sell wine as an investment,” said Veseth, emeritus professor at the University of Puget Sound and editor of the blog The Wine Economist. “Some people (such as those in Australia, New Zealand and Idaho) said, ‘Come to us if you’re running out of wine.”

But all the panic was for naught, Veseth said, pronouncing: “The world is closer to equilibrium now than it has been for the past dozen years.”

Lessons to be learned
The farce was not without value, according to Veseth, who proceeded to outline the top lessons that can be learned from the wine shortage that will likely never materialize.

The fact that wine production in Australia and wine consumption in China is capable of wreaking havoc on the U.S. wine industry is a sign that the nature of the wine market has changed, he said, and that’s not all bad. Improvements in winemaking, winegrowing and management practices in the past few years have raised wine quality on a global scale: “The tide has risen,” Veseth said.

This does not, however, mean there is a single global wine industry.

“Globalization has magnified the segmentation of the wine market” with regard to wine quality and price, Veseth told the crowd. “Increasing the competition magnified the difference between them.”

Focusing on the minutia of each sector would be incredibly complex, but Veseth encouraged the audience not to overcomplicate the issue, saying, “Bringing a market into equilibrium is easy: It’s supply and demand.”

“Every year the global market creates these shortages and surpluses.” Last year, for example, Russia was unable to secure the amount of bulk wine that country’s wine business is accustomed to receiving from France and Spain. Bulk wine buyers there turned to South Africa for supply, and consequently 60% of the wine produced in South Africa was sold as bulk wine.

‘The economics are shifting’
According to Veseth, the wine industry’s center is shifting from the Old World to the New World to what he calls the “New New World.” By 2018 wine consumption in sub-Saharan Africa will be growing faster than in China, he said. U.S. wineries don’t need to start exporting to South Africa today, but Veseth said it is wise to look at such trends and consider the value in a long-range plan that follows the “shifting center,” which includes the growing number of U.S. wine drinkers of Hispanic descent.

The effect of these decisions extends beyond wine sales, Veseth said. For example: Heavy taxes on wine in England have slashed the profit margin for wineries shipping there, resulting in less money for capital improvements and development, which has driven down the quality of wine consumers are able to purchase in that country. The consequence is that wine has lost some of the cache traditionally associated with the beverage, and some consumers are leaving wine behind as they move to beer, spirits and ciders.

Wine volume up 5%
With tanks “brimming full” of high-quality 2012 and 2013 vintage wine, U.S. wineries should expect healthy returns in 2014, according to industry analyst Jon Fredrikson of Gomberg, Fredrikson & Associates.

Not that wineries had a bad year in 2013. Fredrikson’s volume growth estimate, based on 10-11 months of data, was 5.2% for domestic wines, totaling 237 million cases. He estimated California shipments grew by 3.6% to 216 million cases.

 

 

Comparative Wine Shipments to the U.S. Market
(in millions of cases)
Area Where Produced 2012 2013 estimated Case Change % Change
California 208 216 7.5 3.6%
Other States 28 33 4.8 17.1%
Subtotal U.S. 237 249 12.4 5.2%
Imported 124 121 -2.8 -2.3%
Total Wine 360 370 9.5 2.7%

Source: Gomberg, Fredrikson & Associates, California Board of Equalization, DOC, TTB, GFA estimates

Shipments in other states rose 17%, buoyed largely by the growth of cider, which is classified with wine. Imports dropped by 2.3%, and the overall market grew by 2.7%. Looking back to 2001, the total U.S. wine market has ballooned by 50%.

Fredrikson echoed fellow speaker Veseth when he said, “Trying to follow what’s happening in the wine market is difficult. Many things are happening simultaneously, and there is not always a clear trend to follow.”

He described 2013 as a slower growth year, a transitional one, but a year in which “the foundation was built for a strong growth year in 2014.”

The transition brought slowing growth (especially in the large $3-$7 per bottle segment), while upper price points generally grew. Fredrikson said the slowdown resulted from the shortage of supply from the 2010 and 2011 harvests, which prompted many producers to raise prices. Those price hikes reduced economy-priced wine shipments in 2013. In addition, the rapid rise of Moscato and other sweet wines slowed in 2013.

Food stores sold less volume in several inexpensive large-format packages, as sales of 1.5-liter bottles dropped by 3%, and 5-liter boxes dropped by 5%. Boxes in the 3-liter size grew 10%, however.

Fredrikson reminded the audience that 80% of California table wines are priced below $10, so their underperformance was widely felt.

Craft beer and cocktail competition
Craft beer and cocktails are competing for wine drinkers, he said, noting that wine represents 18% of the value of alcohol sales, and craft beer now takes 7%. Craft beer and cocktails have adopted the tactics of wine to educate drinkers and market to them.

The panel’s moderator, Francesca Schuler, chief marketing officer of the BevMo retail chain, underlined the point. “Wine is one of the most attractive of all consumer packaged goods right now,” she said, “but competition is fierce and continues to grow.”

She advised wineries that price-cutting is becoming the No. 1 weapon in the wine trade. “Pretty soon it is going to commoditize the beverage, as it already has for soup and electronics, if we don’t figure out a better way,” she said.

Schuler urged wineries to help retailers by bringing them unique products, whether through private labels, new taste profiles or unique packaging.

Competition comes from within the wine segment, too. Gomberg showed a pie graph that documented French wineries receiving more label approvals from the TTB in 2013 than California wineries. Brand proliferation combined with distributor consolidation made it more difficult to maintain adequate national distribution.

One way around that bottleneck was direct shipping, which grew by 9% in volume for U.S. wineries according to the Wines & Vines/ShipCompliant model.

Fredrikson described the big winners of 2013 as red blends, and Cabernet Sauvignon and Pinot Noir priced above $10.

He named Bogle Vineyards of Clarksburg, Calif., as 2013 Winery of the Year. The family-owned winery passed 2 million cases in 2013 and grew by 12% on the strength of over-delivering quality at its price point. “It’s the consumer pulling their wines through the market,” Fredrikson said.

Acreage estimated at 645,000
The wine and grape markets are balanced through 2017, according to Nat DiBuduo, president of the Allied Grape Growers

He said there could be a slight over supply of grapes by 2017, the furthest year of Allied’s estimates, but DiBuduo said he’s confident wineries can grow their sales to support that supply level. “I don’t think there’s a problem,” he said. “We’re not saying stop planting.”

DiBuduo also shared Allied’s best estimate at the total number of vineyard acres in California. He said based on reported acreage, permitted acreage numbers from the state and estimates provided on new acreage by nurseries, 645,000 vineyard acres are planted in California with 90,000 non-bearing (newly planted) and 555,000 bearing.

Just under 30% of the new acres are planted to Cabernet Sauvignon, for which wineries continue to have high demand. DiBuduo said the variety is planted in all areas of California to support all market tiers. Chardonnay is the second most popular variety for new plantings at 14%, followed by Pinot Noir at 13%. Red varieties of wine grapes account for 71% of California’s new plantings, and white account for 29%.

His organization now estimates the 2013 wine grape harvest in California measured 4.05 million tons, 11% above the four-year average. The region with the biggest gain over average was Lodi, which yielded 925,000 tons, and was 15% over normal. California’s Central Valley yielded 2 million tons.

DiBuduo said the 4 million-ton mark is likely to be the new baseline for California’s wine grape harvest, although the 2014 harvest is expected to be at around 3.8 million due to the consecutive large harvests of 2012 and 2013 combined with worsening drought conditions.

With California’s total rainfall and Sierra Nevada snowpack at record low levels, DiBuduo said it’s clear what the No. 1 issue is: water.

He said growers are concerned about a lack of water for frost protection, poor spring growth and increased pest pressure. Water should also be of significant concern on the production side, since it takes multiple gallons of water to produce 1 gallon of wine.

DiBuduo said he’d been asked several times at the symposium about the western side of the San Joaquin Valley and if growers there would be able to supply grapes. DiBuduo said he’s heard from growers there that they’ll idle their row crops and use their limited water on higher value products like wine grapes.

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