November 2013 Issue of Wines & Vines

Wine Industry Expansion Continues

Suppliers say wineries and vineyards are growing in our sixth annual survey

by Tina Vierra
Suppliers are an informative resource for measuring the health of any industry. This year’s survey of companies that offer equipment, supplies and services to the wine industry showed strong growth for the second year in a row—as well as some interesting replies to questions of expansion and credit.

Continuing expansion
In numbers even stronger than last year’s showing, 86% of suppliers reported seeing wineries and vineyards expand this year. Some predicted that, given the large volume of the 2012 vintage coupled with predictions of an equally large 2013 harvest, growth will continue for up to four years while these vintages make their way to market.

Regionally, suppliers report that expansion is more rapid in eastern wineries than on the West Coast. Vineyards faced challenges of drought in the West this year, and too much water on the East Coast. Central Coast wine regions of California, they said, have grown rapidly during the past 20 years, with Washington state booming for the past 10.

“The 2012 harvest pushed wineries to get moving,” one respondent noted. “Development and redevelopment projects are up and running at a pace I haven’t seen in about seven years.”

Looking before they leap
When asked about their impressions of the financial health of their industry clients, 66% answered that it was getting better, while 30% thought it was merely holding steady. Only 4% thought their clients’ financial situations had declined since 2012.

The cautious minority seemed driven by concerns about consolidation in the industry. “I’m seeing smaller producers facing cost challenges and ultimately selling out or being absorbed by large operations,” one supplier commented. “Products from off shore are impacting the profitability for producers.”

“Consolidation is the key,” agreed another, “with winery purchases of vineyards and other wineries and businesses from outside of California and the U.S. purchasing wine interests here.”

Several suppliers saw the bright side of a few quiet years for wineries: time to decide on improvements such as vineyard replanting, energy-efficiency projects and new technologies to improve wine production and quality. As their clients’ financial health improved during the past two years, they could implement what they’ve been planning.

Credit is still tight
In a big contrast to the 86% of suppliers who see industry expansion, only 39% thought that credit and financing for wineries and vineyards were improving this year; 55% thought conditions remained about the same as last year for financing.

Ben Narasin’s report in Wines & Vines’ September Wine Industry Finance Issue indicated that finance experts saw credit availability opening up, but only at the A+ credit levels that most wineries don’t enjoy. Wine industry vendors seemed to be responding to conditions at the everyday winery-operations level, where a winery or vineyard might want a line of credit with its bank to buy new tanks, a bottling line, upgrade a facility, put in a new wastewater or solar thermal system, or replant a vineyard block.

Wines & Vines asked Vic Motto, a global banker, founder and CEO of Global Wine Partners, to explain why the survey indicated credit is still tight at ground level.

“It is true that the industry in general is seeing industry growth and therefore expansion. However, there are two factors that mitigate this and affect the availability of capital,” Motto explains.

“First, while the industry is growing overall, individual winery results are quite variable—perhaps more variable than ever. In other words, not everyone is sharing in the growth. Some wine companies have strong growth, while others are still struggling to grow.

“Related to that is that growth in sales is harder to translate into growth in profits. As the industry has grown in the number of producers, it has become more fragmented and therefore more competitive. We have lower margins, higher operating expenses and therefore lower and/or more variable profits for some wineries.

“More variable profits and less predictable profit trends change the risk profile for banks, so bank underwriting becomes more stringent. While banks are aggressively competing for winery business, credit is harder to get because the underwriting is more stringent.

“The good news is that credit is cheap. The bad news is that it’s harder to get.”

Motto observed that the global economy still shows uncertainty after five years in decline, with extremely slow recovery. A very small percentage of wineries have failed or gone bankrupt in recent years, and in spite of how few have failed, risk-averse banks are affected by it and will keep underwriting tight until the general outlook is stronger.

Orders continue to be strong
With orders coming in from wineries and vineyards, 86% of suppliers expect growth to continue in the next year. Respondents to the survey spoke of stability, healthy slow growth and positive changes (though no dramatic ones). Orders for many products and services already are in place for 2014 and 2015.

At Bergin Glass Impressions in Napa, Calif., Mike Bergin says packaging season normally winds down in September for a couple of months, and in November, the company begins personally contacting each client to determine order levels and design changes for the next bottling season.

“This year,” Bergin says, “the 2014 orders are already coming in early September, with clients calling to bump up the volume.”

Dustin Hooper at Vintage Nurseries, one of the largest nurseries in California, is taking orders for 2015, 2016 and 2017. “On the vineyard side, we see a lot of careful and long-term planning, whether for new development, grafting over to new varieties or replanting strategies,” he reports.

Dewitt Garlock is a California vineyard management consultant with more than 20 vintages under his belt, who says that planting is robust on the Central Coast, with larger wineries and partnerships still buying new properties to plant winegrapes. Water issues are still plaguing the Paso Robles area.

“Vineyards in the Central Valley of California are being removed, as the price for Thompson and other varieties has nosedived this year,” Garlock said. Hooper agreed, adding that Thompson has been pulled out steadily for about four years now and is being replaced with Fiesta, Colombard and Muscat vines.

Both vineyard experts reported strong pest pressures in California’s North Coast vineyards up until harvest 2013 but few late-season challenges such as mildew and botrytis. Red blotch disease is spreading, and all parties from scientists to nurseries to vineyard managers are carefully testing and evaluating rootstocks and vines for leafroll virus, young vine decline and other latent diseases.

Tony Bugica of Bacchus Vineyard Management (Windsor, Calif.) believes the debate over hand-labor vs. mechanization has only grown stronger since the economic downturn, and he believes it will likely be the biggest issue in premium winegrowing in the next few years. “Winemakers prefer hand-tended vines and hand-­?picked grapes, but the push to mechanize may overcome objections.”

In the winery, Nathan Williams of Santa Rosa Stainless Steel saw tank orders up again this year—both from winery expansions and new builds.

“We did a project for Honig Winery (Rutherford, Calif.) where they gutted a building of old tanks and replaced them with new, increasing their total capacity. We also did the new Tamber Bey Winery (Calistoga, Calif.) and Steve Kistler’s new winery (Sebastopol, Calif.), which is all new construction. I’d say it’s about 50/50 new builds and expansions.”

Tank designs and add-ons affected by winemaking quality decisions included more seed screens and racking screens for pump overs, tanks with sloped floors for easier cleaning and an increased demand for conical tanks for high-quality red wines.

Pricing confidently
Another indicator of confidence in business growth from our survey results is that suppliers are continuing to plan at least modest price increases for their products and services in the next year. Twenty percent indicated they would increase prices more than 3%, and 28% said they would increase prices by 3% or less.

“I held prices back for the past four years,” came one response, “and I need to catch up on expenses that increased during that time.” This was the case with many suppliers—some reported holding back prices for anywhere from two to four years while absorbing increases in their own raw materials costs, labor costs or unfavorable exchange rates for overseas products—who are finally feeling that they can raise prices.

Only five respondents to the survey were planning to lower prices.

With steady expansion in the industry, ?a couple of healthy harvests and a slowly improving general economy, suppliers are optimistic in spite of some cautions and the tight credit market.

Santa Cruz, Calif.-based designer Ed ?Penniman, in response to our survey, went directly to one of his winery clients and asked if they felt their financial health was improving. And John Bargetto of Bargetto Winery (Soquel, Calif.) said, “Yes, our financial health has improved for the past 18 months. After 80 years, the winery has been through many ups ands downs, but this one was in fact the Great Recession. Things are much better than they have been in five years…but the wine business will always require great commitment.”


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