When Jim Spaulding started Stonegate Winery in this Napa Valley village 12 years ago, his main problem was getting enough grapes to make all the wine he could sell.
Today, with U.S. wine consumption stagnant for three years in a row, bargain-priced imports capturing an ever larger share of the American market, and boutique wineries like Stonegate still proliferating, Spaulding has a new problem: selling all the wine he makes.
"We make a lot better wine than we used to, but there are a lot more wineries making good wine," he says. "Never again will we think we can sit back and the product will sell itself."
To help Stonegate stand out from the crowd, including such similarly named competitors as Stony Hill Vineyard in St. Helena, Stoney Creek Vineyards in Somerset and Stoneridge Winery in Sutter Creek, Jim Spaulding, his former wife Barbara, their son David and his wife Kathleen have opened their family-operated winery to tourists, started selling Stonegate wine glasses, aprons and T-shirts, and finally built an ornamental stone arch in front of the winery to match the drawing on their wine labels.
Sends Out Newsletters
The Spauldings are also getting out and calling on wholesalers and retailers in key cities, sending out newsletters to customers and prospects, and, most significantly, lowering their prices. Stonegate Chardonnay, once $10 a 750-milliliter bottle, now goes for $9. Sauvignon Blanc has dropped from $8.50 to $7.
As Stonegate goes, so goes the California wine industry. Producers from the smallest to the largest find themselves scrapping harder for slices of a market that stopped growing in 1982, when the nation's 15-year boom in wine drinking fizzled out.
Shipments from California vintners rose a scant 0.1% in that year, 1.5% in 1983 and 2.6% in 1984. All the growth in 1983 and 1984 came from wine coolers, those punch-like mixtures of wine, carbonated water, sweeteners and fruit flavors that have caught on with young consumers. With coolers factored out, wine sales have remained flat for three straight years.
The precarious health of the California wine industry has statewide significance: Wine grapes are among the state's most valuable crops. California's 600-odd wineries ship about $2.5 billion worth of wine a year, for which consumers pay about $5 billion at retail. And an estimated 60,000 Californians work full-time or part-time at some level of the wine business.
An industry that large is far from monolithic, and at the other end of the spectrum from Stonegate are the large wineries that mass-produce low-priced jug and bulk wine. Among these, E. & J. Gallo Winery stands out as the largest producer, with 38.5% of all California wine shipments last year, according to San Francisco wine consultants Louis R. Gomberg and Jon A. Fredrikson. The second largest producer, Seagram Co., with 10.1% of the shipments, is the most diversified. Unlike Gallo, which concentrates on lower priced brands such as Gallo and Carlo Rossi, Seagram spans the market.
Its Sterling Vineyards winery in Calistoga produces premium wines. Monterey Vineyard at Gonzales in the Salinas Valley and Paul Masson Vineyards wineries at Madera and Soledad produce mid-priced brands. Taylor California Cellars at Gonzales concentrates on lower priced wine. In addition, Seagram markets wine made by half a dozen independent Napa Valley producers, owns a winery in New York State and imports a number of foreign brands.
Far From Pleased
Overseeing U.S. operations as president of Seagram Wine Co. is Richard L. Maher, whose previous jobs include stints in marketing management at Gallo and Heublein, Inc.'s United Vintners and eight years as president of Beringer Vineyards. The 51-year-old Maher shuttles between Seagram headquarters in New York and Seagram's plants in California two or three times a month. He has an ideal vantage point from which to assess the industry, and he is far from pleased.
"This is the most intense competition I've seen in the wine business," he says. "Everyone is getting squeezed all along the line."
The root cause of the squeeze, of course, is the tapering off of wine consumption, which Maher and other experts attribute largely to Americans' growing health, fitness and nutrition consciousness, and also to the growing grass roots movement against alcohol abuse and drunk driving. Like wine, beer sales are flat, and hard liquor is in decline. Just as white wine replaced the martini at many business lunches and before dinner in the 1970s, many wine drinkers are switching to bottled water, or nothing, in the 1980s.
With inventories of unsold California wine equivalent to 20 months' shipments, many wineries are cutting back production to bring it more in line with sales. But winery construction continues. After averaging 30 new wineries a year between 1970 and 1980, California added 70 wineries in 1981, 51 in 1982 and 48 in 1983. Start-ups in 1984 haven't been officially tallied, but are believed to total several dozen.
Grape Growers Hurt
Stagnant wine sales have badly bruised grape growers as well as vintners. State wide, growers averaged $196 a ton for their wine grapes last year, down from $208 a ton in 1983, $220 in 1982 and $268 in 1981, the State Department of Food and Agriculture estimates.
Prices for premium varieties grown on the North Coast in Napa, Sonoma and Mendocino counties have remained high, but in the San Joaquin Valley where most of the state's wine grapes are grown, vineyard values fell from $10,725 an acre in 1981 to $6,725 last year, according to Bank of America.
Prices for a number of varieties have fallen below irrigation, fertilizing, dusting, pruning, picking and other production costs. As a consequence, owners of tens of thousands of acres of vineyards are converting them to other uses.
"My grapes are coming out because for the last three years they have cost me money," says Paul La Vine, who owns 15 acres of Valdepenas, a variety that has lost favor along with the red jug wines into which it is blended.
Although disastrous for growers like La Vine, declining grape prices have helped many wineries by reducing their raw material costs. But they also have contributed to the drop in wine prices that has pinched producers the last three years.
Few Make Money
Lower prices and stagnating sales spell profit squeeze. "Very few wineries--small, medium or large--are making money," says George Vare, a San Francisco consultant who publishes a $350-a-year monthly wine-industry newsletter.
Even those wineries still making money aren't making much. "This is a very capital-intensive business," Vare says. "The investment per sales dollar is very high, as are inventory and interest expenses, and the return on investment is below general business standards."
Exactly how well--or poorly--the biggest producers are doing is difficult to discern. Most, including Gallo, are privately owned and don't report financial results. Others are part of publicly held corporations that do report results but don't break out their wine operations.
For instance, Seagram Wine Co. and other U.S. wine subsidiaries of Joseph E. Seagram & Sons Inc. are lumped in with the distilled-spirits operations of the Montreal-based parent, Seagram Co. One security analyst who follows the company believes its U.S. wine operations are marginally profitable, while a second thinks they're in the red.
Both analysts agree that Seagram's return on its investment in the wine business is low. The investment includes $238 million Seagram spent in 1983 to acquire the Wine Spectrum group of wineries from Coca-Cola Co. The acquisition included Sterling Vineyards, Monterey Vineyard and Taylor Wine Co.
Forced to Close
The capital-heavy requirements of wineries of all sizes have put many producers deep in debt. And slumping sales, prices and profits have caused a number to fall behind on loan payments. One debt-beset producer, Stony Ridge Winery in the Livermore Valley east of Oakland, shut down last December and went into voluntary receivership. Others may not be far behind.
Consultant Vare estimates that 50 to 100 small California wineries are available for sale or would welcome a financial partner. However, the general shake-out of undercapitalized, less efficient wineries that has been predicted for a decade has still not materialized. One reason is that many of the small wineries that have proliferated in recent years are weekend labors of love of affluent lawyers, doctors, dentists and others who would hate to sell out.
Jim Spaulding is among the weekend laborers of love. A former medical reporter for the Milwaukee Journal, he grew grapes in his suburban Milwaukee backyard and fermented wine in his refrigerator as a hobby, before moving to Berkeley in 1971 to teach journalism at the University of California. He and his then-wife Barbara bought 30 acres near Calistoga as a future retirement vineyard, and only later started the winery to provide a home for their grapes.
During the school year James C. Spaulding the professor lives in a rented house in Berkeley, commuting on weekends to Calistoga. There Jim Spaulding the wine company president puts on his dungarees and work boots, rolls up his sleeves and pitches in at the winery.
A Way of Life
"This is a way of life for us," the 63-year-old wine maker explains. "We have no expectation of making a lot of money."
The way of life has continued, even though the Spauldings ended their 34-year marriage last year. While living apart--he in an apartment in Calistoga, she in a converted prune-drying shed on a hillside vineyard outside town--they remain friends and business partners.
Stonegate Winery started showing a profit in 1977, four years after it opened, and has made money ever since, he says. However, investment in new equipment and buildings has produced a negative cash flow in many years. Overall, "we have put more money in than we have taken out," he says.
Although Stonegate and many other wineries have cut their prices to remain competitive, many producers have debt obligations that can be covered only by selling all the wine they produce at relatively high prices. "So many new California wineries have high debt service for expensive new equipment and land that they have to charge high prices to have a chance of making money," says Steve Boone, operations manager of the 103-store Liquor Barn chain. As a result, "California super-premium wine prices are too high compared with French, Italian and German wines."
Despite high prices for many premium wines, Boone notices that "people are becoming more interested in quality than quantity. They will drink less wine but buy a better bottle of wine. Liquor Barn's premium business is up significantly, and each year it is a larger share of the business. At the same time, economy brands and some mid-priced brands have lost share."
Many wine makers are following the public's trading-up trend by reducing their participation in the price-sensitive, low-profit jug wine end of the business and increasing sales of the premium wines that offer the greatest profit potential. For instance, Sebastiani Vineyards of Sonoma has dropped some of its jug wines and allowed total shipments to fall by about a third since 1980, but says it is averaging 37% more revenue per case.
ISC Wines is introducing a new line of vintage-dated, premium-priced Sonoma County varietal wines at the same time that it is trying to reposition its old Italian Swiss Colony brand from an economy-priced jug wine to a popular-priced brand like Almaden, Paul Masson and Inglenook.
Another ISC brand, Lejon, is being repositioned as the nation's first wine for women. Lejon wines have been reformulated to reduce the tartness of the whites and the tannic taste of the reds. Labels feature a series of impressionistic paintings of country scenes and village streets in pastel colors, to project a feeling of warmth and romance.
"Women buy a little over half of the wine and drink a little under half, but most major brands are pitched to men," Moyer says.
Some industry observers wonder, though, whether Lejon will have any more success carving out a new women's-wine segment than producers of light wines had in appealing to waistline watchers. Introduced by a number of major producers in 1981, light wines with reduced caloric and alcoholic content were expected to duplicate the success of diet sodas and light beers, and some experts predicted they would claim 10% to 15% of the table-wine market within five years.
Light Wines Fizzled
However, consumers, while associating soft drinks with sweets and beer with the beer belly, never regarded wine as high in calories in the first place. Many were turned off by light wines' weak, watered-down taste. As a result, light wines never captured more than 2% of the table-wine market, consultant Vare estimates, and slid to less than 1% last year. Several producers, including Sebastiani Vineyards, have dropped their light wines, while others have stopped advertising theirs.
Going light wines one better, Joseph E. Seagram & Sons is going national with a new line of de-alcoholized wine. Whereas light wines' alcoholic content ranges from 7% to 9%, Seagram reduces the alcohol in St. Regis Vineyards wine to less than 0.5%, using a low-heat, high-vacuum process that it says does minimal damage to the flavor. The wine is then pasteurized in the bottle, like beer, to kill any remaining yeast that could re-ferment it.
Seagram hopes St. Regis will appeal to health- and performance-conscious consumers who like the taste of dry wine but not its effects. However, its relatively high suggested retail price of $2.99 for a 750-ml. (25.4-ounce) bottle limits its sales potential.
The most successful new wine product in years is the wine cooler. This punch-like mixture is about half wine and contains 4% to 6% alcohol. Wine makers hope the cooler will provide a transition for young people who are not fully weaned from sweet soda pop but who have not yet acquired a taste for dry table wine. However, some observers doubt this will happen.
"Cooler isn't a wine, it isn't being sold as a wine, and it almost certainly will not recruit customers for real wine," Paul Gillette, editor and publisher of the Wine Investor newsletter, states.
Even experts who see a permanent niche for coolers predict an imminent shakeout among the 50-odd brands on the market. "There are a lot of hastily slapped-together products out there," consultant Vare says. "Half a dozen brands at most will survive."
Other experts also question producers' rush to capitalize on consumers' recent preference for white wines. Leon D. Adams, author of "The Wines of America," told a recent gathering of the American Wine Society: "I think the wine industry has made a mistake during the past decade in advertising wine mostly as a white beverage rather than as a red. Only red wine improves the taste of hearty main-course foods. No other beverage does that. Perhaps that mistake is responsible for the recent decline in the rate of increase of wine consumption in the United States."
As public taste has shifted sharply to white wine, which now outsells red four to one, the industry has been faced with a surfeit of the red- and purple-skinned grapes from which red wine is made. The solution has been to prevent the skins from coloring the wine by removing them soon after the grapes are crushed and then fermenting the clear-colored juice alone. The result is "blush" wine--so called because of the pale pink color that typically tinges it.
Blush wines, including White Zinfandel, Pinot Noir Blanc and White Cabernet Sauvignon, are winning increasing acceptance among consumers who like their wine light, fresh, fruity and chilled. Wine makers like blush wines, too, not least because they require far less aging than red wine and, therefore, improve cash flow.
Flooding the Market
However, so many wine makers have joined the rush to blush that at least 175 brands are now on the market, with more coming out each month. The flood is crowding retailer shelves and depressing prices. "We haven't had a price increase for five years," complains Roger Trinchero, vice president and general manager of Napa Valley's Sutter Home Winery, a major producer of White Zinfandel.
While blush wines represent a clever solution to an oversupply problem in vineyards, some marketing ploys--such as commercials based on competitive taste tests--have proved less successful, and others--such as those involving discount coupons and mail-in refund offers--are controversial.
Marketers say refunds serve a useful purpose when used as an inducement to get consumers to try a new wine. But when used on a broad line of old wines, they reduce the brand's image as well as its price.
"Wine should not be sold like soap and toothpaste," says John De Luca, president of the Wine Institute, the San Francisco-based trade association that represents most California vintners. "We should not appear to be trying to promote wine with rebates and coupons."
Wants Ban Restored
Rebates, coupons, premiums and other freebies used to be illegal in California in connection with alcoholic beverage sales. But a 1984 court decision reversed that. The Wine Institute supports proposed legislation to restore the ban, but the bill has gotten nowhere in Sacramento.
The Wine Institute's position is noteworthy not only for being at odds with some of its own members' practices but also in favoring more government regulation of an already heavily regulated industry. But the institute has taken similarly mixed stands on federal issues involving broadcast advertising and ingredient labeling.
The broadcast advertising issue came to a head last month when a Senate committee held hearings on the emotionally charged question of whether TV and radio ads for wine and beer encourage consumption, especially among youths and heavy drinkers, or simply induce those already consuming wine and beer to choose among competing brands. A broad coalition of consumer, religious and educational groups contend that the ads encourage consumption and should be banned, or time made available for counter-commercials.
"Most wine ads are relatively innocuous," says Michael Jacobson, executive director of the Center for Science in the Public Interest, the Washington nutrition advocacy group that is spearheading the coalition. "But many ads associate wine drinking with sophistication, social success and business success. And there is never a mention that drinking these wines could lead to a boating accident, or child abuse, or addiction."
One reason the anti-ad forces find wine commercials less objectionable than beer commercials is that the Wine Institute has a non-binding Code of Advertising Standards that excludes the use of athletes, rock stars and sexiness in ads. "California wine won't promise to make you popular, successful, an over-achiever or an adult," the institute says.
The Wine Institute would like to see its voluntary code made official and compulsory, and has petitioned the Treasury Department's Bureau of Alcohol, Tobacco and Firearms (BATF) to adopt the code as a federal regulation for all alcoholic beverage advertising in all media. "We prefer this to a ban on broadcast advertising or equal access for counter-commercials," institute president De Luca says.
Advertising is far from the only controversy concerning wine that currently is getting a hearing in Washington. Several issues involving wine ingredients are before the BATF.
Last year the BATF banned preservatives and clarifying agents containing sodium in wine because of Food and Drug Administration concern over sodium's role in causing high blood pressure. And the BATF has proposed reducing the allowable level of the preservative sulfur dioxide because of FDA concern that sulfites can trigger severe allergic reactions in asthmatics and other hyper-sensitive people.
However, the Center for Science in the Public Interest would like the BATF to go one step further and require wine makers, as well as brewers and distillers and makers of the low-alcohol wine coolers, to disclose ingredients on their labels. The wine industry has been fighting the proposal, and so far has been successful in blocking labeling of all ingredients, except the seldom used coloring agent Yellow Dye No. 5, which is also an allergen.
Trade Gap Widening
While federal regulators sort out the pros and cons of ingredient labeling, the wine industry is pressing federal officials concerned with foreign trade to help reduce the huge and growing gap between wine imports and exports. With 1984 imports of foreign wine up and exports of American wine down, imports exceeded exports 23 to 1 by volume and 38 to 1 by dollar value.
American wine producers blame the trade gap not only on a strong U.S. dollar and discriminatory foreign trade barriers and tariffs, but also on foreign government subsidies that enable producers to dump cheap wine on the U.S. market.
"Our contention is that the price of many Italian and French wines to the U.S. importer is only 20% to 60% of the cost of production," says John Weidert, president of the American Grape Growers Alliance for Fair Trade. Weidert's Fresno-based group, representing grape growers throughout the nation, is preparing a petition to the U.S. International Trade Commission asking it to impose countervailing or dumping duties, or both, on imports of lower priced generic wine from Italy and France.
Some experts question how good a case the American Grape Growers Alliance will be able to make. Wine Investor publisher Gillette points out that European wines are priced higher on the average in the United States than American wines, and estimates that only 10% of the imports retail for less than $2 a 750-ml. bottle. His conclusion: "There is no dumping here."
How much help the U.S. industry will receive under the new Wine Equity and Export Expansion Act remains to be seen. Signed by President Reagan last October as part of the Trade and Tariff Act of 1984, the measure requests the Administration to negotiate a reduction or elimination of foreign trade barriers against American wine, and to consider retaliatory action if the negotiations get nowhere. But it doesn't mandate retaliation, as the U.S. wine industry has requested.
Targets Foreign markets
The act also provides federal funds, about $600,000 the first year, for overseas market development. Most of that money will be spent in countries where wine production is low and the potential for increased consumption is high. Says the Wine Institute's De Luca: "We're targeting Britain, Japan, Hong Kong and Singapore."
But Bank of America economist Fredrick Cannon argues that "wine exports aren't essential to the U.S. wine industry anyway. The United States itself offers the greatest potential wine market."
Tapping the vast potential American market won't be easy, though. For instance, 12 states restrict packaged wine sales to state-operated retail outlets. Thirteen states and the District of Columbia restrict or prevent food stores from selling wine. And 15 states tax out-of-state wines at higher rates than those made in the state.
However, these and other state barriers are coming down one by one. Last year a court decision forced Hawaii to end its exemption for Hawaiian wine from the tax it imposes on out-of-state wine, and Virginia followed suit this January.
New York State, which restricts wine sales to liquor stores, opened up food-store sales of wine coolers for a two-year trial period. Although discriminatory in providing that the coolers must contain wine made from New York grapes, the move has been welcomed by out-of-state wine makers as a first step toward eventually uncorking food-store sales of wine from all over. However, a federal judge has ruled the law unconstitutionally protectionist. While New York appeals his decision, wine cooler sales in food stores continue.
Image Problem Lingers
Many Americans still associate wine with bums passing a bottle of Muscatel. And this image complicates the wine industry's efforts to promote wine as a beverage of moderation to be enjoyed with food. However, the obstacle to increased consumption most often cited by wine makers themselves is the intimidation millions of Americans feel in the face of the profusion of wine types, brands, vintages and other alternatives available, the confusion caused by conflicting terminology ("dry" Champagne is sweet, but "dry" table wine isn't) and conflicting advice by experts on such points as to what wine to serve with what meal, and whether decanters and stemmed glasses are necessary.
"Excluding a small elite of wine enthusiasts, 90% of our customers feel themselves to be ignorant of wine and afraid of embarrassing themselves," Seagram's Maher told a Wine Institute gathering last year. "We must take the mystery out of buying wine without destroying the magic that separates wine from soft drinks."
Taking the mystery out of wine is one of the tasks the new Winegrowers of California has set itself. Set up under a joint marketing order narrowly approved by California wine grape growers and wine makers last summer, the group is just beginning operations under state auspices and the direction of both grape growers and vintners.
Winegrowers of California is expected to sponsor research into new uses for wine grapes, lobby to remove state, federal and foreign trade barriers against California wine, and try to demystify and popularize wine through educational and promotional programs. But with a first-year budget of about $4 million raised from assessments on growers and processors, it won't be able to afford extensive consumer advertising.
How much of an impact the new group will make remains to be seen. Some industry analysts expect wine consumption to resume its historic rise with or without industry-wide promotion. They point out that consumption also leveled off for a year or two in the late 1960s and again in the mid-1970s before turning up again, and predict the same thing will happen again.
Other experts aren't so sure. Noting that consumption has remained static despite declining prices, they worry that consumption will slump when prices resume their historic upward trend. Wine, after all, is still a discretionary, even an impulse, purchase rather than the fixture before, during and after meals that the industry would like it to become. And unlike soft drinks, beer, fruit juices and milk, all of which it competes against, wine doesn't even quench one's thirst. This leads some experts to conclude that the only way to persuade Americans to serve wine at meals is to encourage them to serve water as well.