09.27.2016  
 

WIFS Celebrates 25 Years

Founder of finance event compares wine industry today with 1992

 
by Paul Franson
 
wine WIFS 25 years
 
Average cost per ton by variety in 1992 and 2015. Source: David Freed, WIFS

Napa, Calif.—This year marks the 25th anniversary of the founding of the Wine Industry Financial Symposium (WIFS). To commemorate the milestone, WIFS founder David Freed, chairman of the Silverado Group, introduced the program today with some comparisons between the wine industry of 25 years ago and today’s business.

He began with headlines about the wine business from 1992:

• “Wineries Seeing Red,” The (San Francisco) Examiner
• “Banks-Vintners Honeymoon Is Ending,” Santa Rosa Press Democrat
• “Sour Grapes Grow in Wine County Over Tight Credit,” Dan Berger
• “Overleveraged Wineries Finding It Difficult to Locate Alternative Sources of Financing,” Business Journal, Berger
• “Banking Blues: U.S. banks still nervous about lending to the wine industry,” Wine & Spirits
• “Another Winery Files for Bankruptcy,” San Francisco Chronicle
• “The Wine Market in the United States Continues to Decline,” The New York Times
• “Phylloxera, Financial Crunch Uproots the Wine Industry,” Napa Valley Register

It was the same negative financial news that inspired Freed and others to create a forum to inspire a regular, open exchange of thoughts and ideas concerning financial aspects of the California wine industry. The Wine Industry Financial Symposium was the result.

Looking back at the success of the conferences, Freed noted, “After 25 years, we can honestly say that there has been a need for such an event.”

Continuing his discussion of conditions in the early 1990s, he said that the annual 1993 Gomberg Fredrikson Report said that formerly popular wine coolers had plummeted in sales, while soaring demand fueled a 33% Chardonnay boom in 1992 and 21% in 1993.

Sales of most red wines grew solidly after the television show “60 Minutes” reported on the French Paradox, which suggested that red wine consumption may lower heart disease, in 1991. Cabernet sales rose 13% following that event.

In spite of the popularity of large-format bottles of white Zinfandel, blush varietals fell sharply while Merlot sales jumped 60% after skyrocketing 92% in 1992. Meanwhile, European wines declined 12% as importers depleted inventory stockpiles.

According to Gomberg Fredrikson & Associates, the top 12 commercial wineries in 1992 produced 73% of California’s wine:
• E. & J. Gallo Winery
• Heublein
• The Wine Group
• Canandaigua (now Constellation Brands)
• Delicato
• Bronco
• Golden State
• Gibson
• Giumarra

The top seven premium wineries in 1992 produced 15.1% of California wine:
• Sebastiani
• Sutter Home
• Wine World
• Robert Mondavi
• Glen Ellen
• Fetzer
• Kendall Jackson

Now Gomberg, Fredrikson & Associates says that the big three wineries—Gallo, The Wine Group and Constellation Brands—ship 65% of all California wine.

The other wineries that ship more than 1 million cases include:
• Trinchero Family Estates
• Treasury Wine (including Diageo)
• DFV Wines
• Bronco Wine Co.
• Jackson Family Wines (Kendall-Jackson, La Crema, Murphy Goode, etc.)
• A S V Wines
• Bogle Vineyards
• Fetzer Vineyards
• C. Mondavi & Family
• O’Neill Beverage Co.
• J. Lohr
• Korbel

Freed notes that in the annual WIFS survey of wine executives this year, respondents indicated that labor shortages and costs are their biggest concern (47%), with consolidation of distributors and retailers worrying 41% of respondents.

Thirty-six percent also see mergers and acquisitions becoming important, and 25% face higher grape prices. Most (84%) are focusing on higher profit, higher quality wines, while three-quarters are increasing their consumer-direct efforts, and 70% are trying to use more social media and connect more with millennial consumers. The same number are investing in vineyard technology.

Wine preferences
In 1993, as now, Chardonnay was the most popular California wine made with 35% of the 44.5-million-case production; premium blush stood at 26%, Cabernet Sauvignon at 17% and Sauvignon Blanc held 11%, according to Gomberg, Fredrikson & Associates. Now Chardonnay has slipped to 26%, but Cabernet has risen to 19% and the next highest is Merlot with 8% of the 214 million cases made.

Red blends have become very hot, too. They were up 16% in volume and 20% in value last year compared to 10% in volume for Pinot Noir and 6% for Cabernet Sauvignon. Popular red blends include The Prisoner, Paraduxx, Carne Humana, Conundrum Red, Josh Cellars, Coppola Diamond red, various Bogle wines, Apothic Red, Gnarly Head, Ménage a Trois, Cupcake Red Velvet and Big House Red.

And while Chardonnay remains the largest seller among white wines (as well as all varietals), its volume grew only 2% while Sauvignon Blanc grew 11% by volume and 14% in value. Pinot Noir grew 7% in both volume and value.

As the industry has well noted, wines selling for less than $7 have been flat or down, while those selling for $10 to $14 grew 13% in volume (14% in value) and those selling for more than $14 grew 18% by both measures).

A shortage of grapes?
Meanwhile, wineries are being squeezed as grape prices rise at unprecedented rates. Average grape prices for Napa Cabernet rose from $1,638 per ton in 1992 to almost $6,224 in 2015, a growth of 280%.

Sonoma Pinot Noir went from $768 to $3,512, up 357%.

That rise in grape prices is reflected in vineyard values, with top Napa vineyards selling for more than $350,000 per acre but below those in Bordeaux, which can cost $600,000 per acre.

Freed pointed out that consumption of wine isn’t growing as fast as revenue. “The greater yield we’ve seen, however, has generally come from better grapegrowing, not more acreage.”

He noted that according to Allied Grape Growers, wine grape plantings only grew from 525,000 acres in 2012 to 565,000 this year, and they aren’t projected to rise significantly in the next few years as vines are pulled and replaced by nut crops.

However, while planting in the San Joaquin Valley has been static and expected to shrink, the Lodi and Delta growing regions have grown as have the foothills and coastal regions.

As lower-end vineyards are removed, more and more grapes are being imported. Total imports grew from 23% in 2000 to 43% estimated in 2015, and while bottled imports are steady, bulk imports have grown significantly.

Freed predicts that the future of the wine industry will see continued premiumization, which will make wine companies more profitable, but tight grape supplies with rising vineyard prices.

The past few years have seen an unprecedented number of mergers and acquisitions, and Freed predicts that wineries will buy premium brands and vineyards as part of this reality.

Already in the past two years, Gallo bought J Vineyards, Talbott Winery and Orin Swift; Constellation bought Meiomi and The Prisoner; The Wine Group acquired Benziger Winery; Jackson Family Wines bought Pinot specialists Siduri, Penner Ash and Copain as well as Fieldstone Winery in Alexander Valley; and Ste. Michelle purchased Patz & Hall.

Treasury acquired the Diageo brands—though not their vineyards or wineries, which had already been sold to a real estate investment trust. These brands include Beaulieu Vineyard, Sterling, Provenance, Rosenblum and Acacia. In addition, wine companies bought a number of vineyards during 2015 and 2016.

Freed made predictions about the hottest issues in the next five to 10 years:

• Restrictions on tasting rooms will challenge wineries trying to build direct-to-consumer businesses, but he suspects Amazon or others will find a way to deliver lower cost wines to consumers efficiently.

• He thinks price wars will break out due to so many brands competing (including those from overseas), and that will winnow the field.

• And labor issues including minimum wage hikes and shortened work days and weeks (proposed immigration restrictions and deporting undocumented workers surprisingly wasn’t mentioned) should lead to increasing use of mechanization.

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