09.26.2018  
 

Wine Industry Faces Changing Market, Economy

At Wine Industry Financial Symposium CFOs expect recession and grape brokers see large 2018 harvest

 
by Andrew Adams
 
hertz
 
A weak market for California Zinfandel has reached the “peak of excess” according to Turrentine’s “Wheel of Fortune” and could benefit from a reduction in acreage.

Napa, Calif.—Everyone seems to agree it’s coming, but no one is sure when or how severe and how long it could be.

“It” is the next recession and several of the experts speaking here at the Wine Industry Financial Symposium all said the U.S. economy and the wine industry is due to experience another one soon despite mostly positive market indicators.

Three of the industry’s top chief financial officers, from Rombauer Vineyards, Opus One and Huneeus Vintners all agreed a recession and economic slow-down is coming soon although none would hazard a guess about when.

Matthew Owings, with Rombauer, said vineyard and grape prices — especially in Napa County — have the feel of being at the height of a bubble but he wouldn’t hazard a guess on when that bubble would pop as he’s made predictions in the past that were proven wrong. Robert Fowles, with Opus One, agreed, but also couldn’t say when prices would fall from their current highs. Huneeus’ Shannon McLaren likely hopes land prices will stay strong as that company just bought 86 acres of prime Oakville Cabernet Sauvignon acreage.

Fowles said Opus One is still in the market for vineyards as Opus One continues to enjoy strong demand and could sell more wine if they could find the supply.

In a separate panel session on Sept. 26, Andy Beckstoffer, who founded and owns Beckstoffer Vineyards, said the last ten years of economic growth has been unprecedented. "They just don't last that long," he said of the current period of economic growth, adding he expects the cycle to change in the next two years. 

Curtis Mann, wine buyer for the Raley's chain of grocery stores, was a panelist with Beckstoffer and said while he anticipates moderate wine sales growth over the next few years he's concerned a dramatic change in the economy could reverse the recent premiumiziation trend as consumers bought the same amount of wine but at cheaper prices.  

Current grape and wine market
In a session held later in the first day of the two-day symposium that drew more than 300 people, Steve Fredricks, the president of Novato, Calif.-based Turrentine Brokerage, and the company’s North Coast grape broker, Mike Needham, delivered a presentation on the grape and wine market.

Napa County Cabernet Sauvignon bulk wine prices may have reached a tipping point as prices have dropped about $10 per gallon since last year to around $35. Fredricks noted in 2011 about 35% of the purchases for Napa County grapes were at $5,000 per ton or more. In 2017, $5,000 per ton or more was the price in 90% of grape purchases.

Some of the key trends the two noted as indicating a changing market were case sales slowing, traditional buyers have become sellers and bulk wine volumes have been building.

“We’re moving into a transition in the market,” Fredricks said, referencing the company’s “Wine Business Wheel of Fortune” that appears to be shifting toward a long market.

This change could come even quicker as 2018 appears to be a large harvest. Pinot Noir and Chardonnay are coming in larger than expected throughout California. Needham estimated the vintage could see an extra ton per acre on average for California Chardonnay and some appellations may see record Chardonnay and Pinot crops.

Barring any extreme weather, the 2018 harvest should bring significant Cabernet tonnage, especially since 2011 bearing acreage in Lodi, Paso Robles, Lake and Mendocino counties and Washington state has increased by 50% to 60,000 acres in those regions.

Plentiful Cabernet and lower prices should provide additional opportunities in the market as Fredricks said many private label companies, negociants and wineries looking to develop new brands will have more options in terms of supply and prices. “It’s always been a great market of opportunity,” Fredricks said of an excess market. “There’s not all bad news but good news too.”

The market for Sonoma County Pinot Noir has been relatively quiet, seeing fewer buyers since the first quarter. Most recently a few wineries have become sellers to balance their inventories.

Shift in Pinot sourcing
Statewide, Needham noted that buyers who have been priced out of the Russian River Valley and other premium Pinot areas have found success with the Clarksburg AVA and other northern interior valley districts to produce California appellation Pinot at $12 to $15 per bottle. “That’s what has driven a lot of additional demand,” he said.

Another trend seen across California has been a shift in supply for premium red blends. In 2014, California wineries crushed 118,000 tons of blenders that included Petit Verdot, Petite Sirah and Malbec. In 2017 the tonnage for all those varieties had increased but Teroldego’s share of the blender category had risen from essentially zero in 2014 to 6% at more than 11,000 tons.

The success of these blends in the retail market has not translated to increased demand for Zinfandel and Merlot, both of which continue to see a weak market. Many wineries have “cannibalized” their Zinfandel programs to support the growth of blends. Fredricks added that a big crop in 2018 will only further weaken the market for Zinfandel and more acreage, particularly wire-trained Zin in the Lodi appellation, could be removed.

The current rosé boom has not helped Zinfandel despite the efforts of some wineries, Fredricks said, and has instead driven new demand for Grenache and Syrah. He said based on domestic sales and the strength of imports, robust rosé sales may not be a fad. “This premium rosé trend may be a little different and stay for the long term,” he said. “One caution is we don’t need to plant new vineyards for rosé.”

Aside from some Napa County Merlot to support proprietary blend programs or extend a Cabernet Sauvignon brand, the overall market for the Bordeaux variety is stagnant. “We’ve seen a continued soft market with very little demand for Merlot,” Fredricks said.

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