California Wine Industry Turns Sour
Following a decade of unprecedented growth that saw a 50% rise in the number of wineries, vineyard acreage and consumer prices on bottles of wine, it’s the morning after for California’s wine industry.
The state’s second most glamorous business is waking up to slumping holiday sales in nearly all categories of the wine market, according to A.C. Nielsen’s WineScan, the first such broad decline since the 1991-92 recession. It’s the latest blow to an industry already on the verge of crisis.
At least three wineries have filed for bankruptcy protection since the fall, and there have been a number of high-profile mergers as weakened wineries are swallowed up by the competition. Grape growers throughout the state have endured prices plummeting as much as 75% over the last two years, and are desperate to sell vineyard land -- but there are few buyers. Even the state’s most influential figure, Robert Mondavi, is trying to unload hundreds of vineyard acres on the Central Coast. Some growers in the Central Valley have simply given up the fight and are ripping out vines to plant other crops.
It’s all the inevitable outcome of colliding forces: a worldwide glut of wine combined with flat consumption. And it’s bound to get worse for California, with importing rising 17% last year and now accounting for 25% of total U.S. wine sales, according to the Calistoga-based Wine Market Report.
“It’s ‘the perfect storm’: a downturn in the economy, the overproduction of grapes and cheap imports,” said Tom Pillsbury, vice president of estate wine sales with Youngs Market Co., one of the state’s largest wine distributors. “It’s a good time to be a consumer. Prices will continue to drop on wines that are better than ever.”
Prices Falling
In fact, it is looking like party time for wine lovers: prices are falling on wines at all levels, and some hard-to-get labels are more readily available. The improved growing techniques that helped cause the glut have also improved the quality of grapes, and wine, even in the cheapest bottles.
But in short order, the bad times will affect consumers too: The wide variety of hand-crafted wines that have vaulted California’s stature around the world will dwindle, according to industry experts.
“It’s the coming homogenization of the wine industry,” said Kim Stare Wallace, a second-generation winemaker at Dry Creek Vineyard in Sonoma. “Small wineries will be grabbed up by the big guys.”
Those in the industry agree that only well-known brands, and well-heeled vintners, will survive as independent operators.
“We are going to lose scores of wineries to bankruptcy,” said Joe Ciatti, one of the state’s largest brokers of bulk wine, calculating that as many as 200 of the state’s wineries, or more than 20%, could go out of business or be bought by a larger competitor.
Cheap Imports
There is just too much of a good thing. Supermarkets and wine stores are being flooded with cheap, high-quality wine not just from California, but also from Australia, South America and South Africa. At the same time, American drinkers haven’t embraced the windfall as an excuse to drink more wine. Overall, wine sales were flat in 2001 and 2002. Well-heeled baby boomers, whose love affair with premium wine had been driving yearly increases of as much as 20% in that category, are reaching their limit. Younger drinkers, meanwhile, are grabbing a six-pack or sipping martinis, shunning wine as their parents’ obsession.
“We’ve missed a whole generation,” Pillsbury said.
The pain is going to be acute among the vintners whose bucolic, agrarian lifestyle is woven into the fabric of California’s consciousness. Wealthy refugees who cashed out of Silicon Valley, Wall Street and other walks of life poured into wine regions from Santa Ynez to Napa, planting vineyards and pressing namesake wines, sometimes to great acclaim. That pilgrimage pushed the number of California wineries from 600 to 900 during the recent decade, according to statistics compiled by Motto, Kryla, Fisher, veteran wine industry analysts.
As prices fall in the face of the wine glut, these fledgling wineries are being forced out of business, said Fred Reno, president of the Henry Wine Group, another of the state’s major wine wholesalers. “The smaller wineries selling fewer than 20,000 cases a year don’t have the ability to cut prices and stay profitable,” he said. “The really overpriced wines would have to go from $75 to $35 [a bottle] to make a difference” in how much wine is sold.
This fall, with her suitcases full of Cabernet, Chardonnay and a little Sangiovese tucked in the side pocket, Shari Staglin went on a door-to-door campaign to sell wines from the Staglin Family Vineyard to restaurants and wine stores, dropping her long-standing wine distributor in favor of the personal approach. The distributor had suggested it was time to lower the price of her Cabernet to something less than $90 a bottle.
“Two years ago, it was so easy,” she said. Buying into the wine industry in 1985, Staglin rode the surge in wine demand during the 1990s, cashing in on the sky-high prices for what some folks in Napa call “rocket juice,” the region’s bold and beautiful Cabernets.
Staglin, funded by her husband’s successful career as a Silicon Valley venture capitalist, built a Tuscan-style villa on their Napa estate suitable for a Hollywood movie. For years, everything came easily. Now it’s peddle or perish.
“We have to push to get it sold,” Staglin said, crowing that she managed to sell all 5,000 cases of her 1999 vintage without dropping the price.
There are so many wineries making personal sales calls, said Caroline Styne, co-owner of Lucques restaurant in West Hollywood, it seems she has a new sales brochure in the mail or a vintner at the door every day. “It can be overwhelming.”
Even mid-sized wineries that ought to be profiting are hurting. Stare Wallace of Dry Creek is fighting to keep the winery her father founded in 1972 independent. Making 130,000 cases a year of moderately priced wine -- $12 to $20 a bottle -- Dry Creek is in a market segment that some experts say continues to expand as much as 6% a year. But it is also a segment dominated by big companies -- Kendall-Jackson Vineyards, Robert Mondavi Family Vineyards and Wineries, Beringer Blass Wine Estates, Constellation Brands, E&J; Gallo Winery -- with out-sized marketing clout.
“We’re hunkered down, hoping to survive,” she said. “Everyone is slashing prices. Big companies are dumping wine on the market. The under-$10-a-bottle market is brutal. You have to fight not to go there.”
Wineries for Sale
“There are a lot of wineries for sale. It’s all being done very quietly,” said Stare Wallace, declining to name her competitors who are considering selling.
The bankruptcies have already begun with Sonoma Creek Winery, Quail Ridge Cellars and Vineyards and Bridlewood Winery.
Sonoma Creek and Napa-based Quail Ridge were mid-sized wineries. And each was a so-called “virtual winery.” Neither company owned vineyards, a winery, or even a storage facility for aging wine, those in the industry said. Both bought grapes from growers and contracted a rent-a-space winery for processing, bottling and storage. It can be a very profitable way to operate right now, said experts, if a company can take advantage of depressed grape prices. Representatives from neither winery were available for comment.
“Sonoma Creek over-committed to long-term grape contracts when prices were high,” Ciatti, the broker, said.
“It’s the haves and the have-nots,” said Lindsay Wurlitzer, regional vice president of American AgCredit, a major lender to the wine industry in Napa, Sonoma and Marin counties. “The successful are more successful and the weaker are weaker.”
Says Ciatti: “If your properties are in Napa or Sonoma, they will be purchased. But the labels will go into the hands of people like Bronco [Wine Co.], who collect labels.”
The brand collectors -- the large wine-making corporations -- often buy wine in bulk, funneling a blend of high- and lower-quality grapes into their various labels, sometimes with little attention to the quality history of the label.
“The big companies aren’t buying yet, waiting for prices to drop,” said Ciatti.
One isn’t. E&J; Gallo Winery bought not just one winery, but two, Louis M. Martini Winery and Mirassou Vineyards, changing a long-held policy to grow only through internal expansion.
Vic Motto of Motto, Kryla, Fisher, the wine industry consultants, expects more than $1 billion worth of winery mergers and acquisitions over the next couple of years. “If you don’t have a strong brand identity, you are in trouble,” he said.
Rich Cartiere, a Calistoga-based wine industry analyst, predicts that within two years there will be one super-sized premium winery, a merger of, perhaps, Mondavi, Beringer Blass and Kendall-Jackson that will completely dominate the market for varietal wine. “You need that clout for worldwide distribution,” he said.
Perhaps, said Walter Klenz, managing director of Beringer Blass, which already has 22 labels and wineries in Australia, Europe and the U.S. and now is focused on picking up some bargains, principally labels in the $8 to $12 a bottle range.
He’s more cautious about buying prestige labels, noting he expects at least 10% of the high-end wineries to “just disappear.” If expensive wine is too readily available, its exclusivity is undermined, Klenz said.
“It’s a dog fight out there,” said Ken Spadoni, a Sonoma real estate broker who specializes in vineyards and wineries. “Mondavi has $70 million worth of Central Coast real estate on the market,” he said. “The banks are bearing down on everyone.... And land values are falling.”
Spadoni said there are more vineyards on the market today than there have been since the 1980s. And none of them are selling. “I’m waiting for the sellers to lower their prices,” Spadoni said, “and telling buyers to wait another year before buying. It is going to get worse before it gets better.”
Over the last year, the signs of financial pressure have been everywhere. Throughout the Central Valley and even as far north as Lodi, wine grape growers began pulling up their vines after this year’s harvest. While there are no firm statistics, thousands of acres are expected to be turned over to other crops or left fallow, according to the California Assn. of Wine Grape Growers.
“The price doesn’t justify keeping them in the ground,” said Gary Wilson, a grower in Shafter, a town near Bakersfield, who plans to pull out 20% of his wine acreage. “Probably everyone in the Valley needs to look at removing something” to alleviate the oversupply.
How will it all end? Many analysts predict two wine worlds will emerge: higher quality, more consistent mass-market blends sold in supermarkets, and a smaller universe of premium wines from the state’s elite growing areas. Prices are expected to creep back up, but it will take years. Naturally, the lower tier will be dominated by giants, like Gallo and Bronco. But the top tier will have to get bigger to stay in the game too, and that’s beginning to happen.
Premier Pacific Vineyards, a winery investment company in Napa, is pushing for approval to build a 5,000-acre vineyard in Sonoma County, which would be the largest vineyard holding in one of California’s most prestigious regions.
“There aren’t enough vineyards for the high-end sector,” said Richard Wollack, co-chairman of the company. “Baby boomers will be consuming more of this wine in their 50s than they are in their 40s, and there’s isn’t enough vineyard land to supply that coming demand. No one else is developing vineyards, but we are.”
