New Chapter for Vineyard Business

Investor David Freed says U.S. wine industry has changed dramatically, and big players are scrambling to secure grapes and land

by Paul Franson
snows lake vineyard
Large wineries are buying vineyard land in an effort to secure fruit for winemaking. E. & J. Gallo purchased Snows Lake Vineyard (above) in Lake County, Calif., in 2012.
Napa, Calif.—In preparation for the 2013 Vineyard Economics Seminar on May 23 in Napa, founder David Freed conducted a survey of attitudes and concerns among wine industry executives.

Freed, who also is chairman of Silverado Premium Properties, a leading wine industry vineyard investment company, added some big concerns of his own to the findings.

“Through the years, the industry has cited the wheel developed by Bill Turrentine of economics 101: When grape prices rise due to shortages, people overplant, then prices drop and the cycle continues.”

For example, in 1995, prices were way up and people planted heavily. In 1998, wine grapes were in oversupply.

Unfortunately, says Freed, “That’s the last time the prognosis worked.”

He notes that there wasn’t much planting from 2005 to 2008 as would have been expected, and in fact, there hasn’t been much vineyard planting in California between 2008 and 2013. California non-bearing (newly planted) acres are down from 2001, yet consumption has grown at 2%-3% annually even during the recession as people traded down.

California wine shipments are up from 163 million in 2001 to 208 million in 2012, according to Gomberg, Fredrikson & Associates, but California wine grape acreage is down from 570,000 acres in the ground in 2001 to 546,000 acres in 2012.

“The need has been met primarily by bulk and bottled imported wine,” Freed says, noting that imports’ market share increased from 22% in 2001 to 35% in 2012, according to Gomberg-Fredrikson.

Shipments of wine made from California grapes actually dropped last year (from 216 million cases in 2011 to 208 million cases in 2012), while imported wine shipments were up 15% (from 107 million to 123 million cases. Other states shipped 29 million in 2012, an increase of 500,000 cases.

The 2012 harvest hit a record in tonnage, but Freed says that only Napa and Sonoma had great years, and that was partly because the harvests in 2010 and 2011 were so low.

He says, “2012 was a good year in Santa Barbara and passable in Monterey and Paso Robles, but was just a good/average year in the Central Valley. Of course, they didn’t suffer as much as Napa and Sonoma from bad harvests in 2010 and 2011.”

He added that 2005 was the previous record year, but the excess was used up in a few years, and the yield from 2009 was gone in a year. “2010 and 2011 were very short.”

Freed said in spite of the large crops last year, wineries took all they could get—not just what they had contracted for—and they didn’t ask for discounts.

And though usually no one starts talking contracts until the Unified Wine & Grape Symposium in late January, winery buyers were negotiating for grapes in December 2012. “They had a short 2011 and short to normal 2010 and pressure from lenders to reduce spending. Demand was like we haven’t seen it for a long time, and I’ve been in the wine grape business for 32 years.”

He added, “There’s only so much California acreage. Wineries could no longer assume that they could get the grapes they needed.”

Wineries also got more flexible about yields. Some wineries in Napa and Sonoma brag about all the fruit they drop, claiming it will make better wine, but research shows the correlation is far from exact. “They let us produce more tons per acre in 2012, and everyone agrees that the quality was excellent.”

Freed said that the tipping point was Joe Gallo’s talk at the San Joaquin Valley Winegrowers Association’s annual meeting in Modesto in 2011. (See Gallo Speaks: Rare Address by Winery CEO.) “When Joe Gallo said they were signing pre-planting contracts, everyone knew things had changed. Gallo is smart. They know what they’re doing.”

Signing contracts wasn’t all that E. & J. Gallo did. It started buying vineyards and wineries, including huge Snows Lake Vineyard in Lake County, Columbia Winery and Covey Run in Washington and more. Gallo also bought a vineyard in Monterey County from Freed’s Silverado Premium Properties.

In addition, Kendall-Jackson/Jackson Family Wines, which had been out of the market in the years leading up to Jess Jackson’s death in 2011, got back in. “We sold a property in Sonoma to them, and wherever we went looking, they were there. They’re still out there,” Freed said, adding that Jerry Lohr of J. Lohr Vineyards & Wines, Trinchero, Fred Franzia’s Bronco, The Wine Group, Bill Foley, Stewart Resnick—all private companies—were buying vineyards, sometimes with wineries on them.

“If we put a vineyard in Paso Robles for sale, we could predict who’d be interested,” he said regretfully. “We had had the business of buying property to ourselves during the recession!”

In spite of divestures, Freed and Silverado Premium Property’s CEO Mark Couchman continue to buy property as they sell others. “We buy and improve the property, then sell it when the time is right. Our investors like to see us take a little profit.”

Wineries not only wanted to ensure a supply of grapes, but they also wanted to control future costs. “They want to know their costs for the next 10 years.”

Freed noted that it’s very difficult to plant a new vineyard, too. “Forget Napa. It took up four years to get permits to plant a vineyard in the Soscol Mountain property southeast of Napa (formerly Kirkland Ranch).”

“There’s not much land in Sonoma either, and in Monterey you have to outbid vegetable farmers, in the Central Valley: nut orchards. Santa Barbara is as hard as Napa.”

All in all, Freed says he’s never seen this much pressure on grapes before. Fortunately, the man routinely called “savvy” has made the right choices.

Get information on the Vineyard Economics Seminar and register at winesymposium.com.

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