Premium Wines, Premium Profits : Industry Sees Gap Widening Between Market Segments

What wine producers have known for a decade--that it’s becoming more and more profitable to make premium wine rather than jug wine--was reinforced at a recent wine industry symposium.

The gap between premium and jug wine segments of the industry continued to widen in 1988, according to a survey the accounting firm Touche Ross & Co. presented at the third annual Wine Industry Financial Forum.

Sponsored by the investment firm Hambrecht & Quist Inc., the meetings are designed to bring potential investors together with wine makers and winery owners to foster “improved financial market access for the wine industry.”

About 20 banks--including five based in other countries--and five U.S.-based long-term capital lenders attended the all-day forum along with representatives of about 100 wineries.

Foreign Banks Welcome

The involvement of foreign banks was new and welcome, said John Fisher, head of the consumer group of Hambrecht and Quist.

“It reflects the increasing presence of European and Japanese banks in the California wine industry and the increasing alternatives available to wineries as a result,” said Fisher.

The Touche Ross survey of 115 wineries reported that while gross profit margins in the wine industry remained flat in 1988 over the prior year, premium wineries increased their profit margins to 47% from 45%. At the same time jug wine producers’ margins fell from 34% in 1987 to 28% in 1988.

Earlier this year, the San Francisco consulting firm Gomberg, Fredrickson & Associates said the volume of premium wine sold by California wineries rose from 20% of all wine sold to 23% of the market between 1987 and 1988. During the same period the amount of money spent on premium wine rose even faster, from 45% of total dollars spent for all wine to 51%.

“High-return wineries spent half as much on marketing as the low-return wineries,” said Gary Brayton, a Touche Ross partner who presented the survey.

He said the survey showed that marketing costs for wineries in the upper quarter of profitability were only 11% of annual expenditures. Wineries with a low profit spent an average of 22% of their total budget on marketing.

Brayton said more-profitable wineries were making more efficient use of their marketing people and were spending less to capture more of the market than wineries with low profitability.

Industry Adjusting

While premium wine sales are up, the wine industry is adjusting to shrinking wholesale and retail markets because of mergers and acquisitions. For wineries to remain competitive in a shrinking market in the 1990s, they must polish their marketing skills, said Charles Rapp, chief financial officer for Stimson Lane Wines & Spirits in Woodinville, Wash.

“Distributors no longer build wine brands,” Rapp said. Wine producers must have employees make direct, continual contact with wholesalers to keep them and their staffs informed of new products, strategies, pricing changes and changes of direction, Rapp said.

Dan Wilson, a partner in Innovative Wine Marketing, a Los Angeles consulting firm, said two-thirds of all wine in California is sold between Santa Barbara and the Mexican border “and 70% of all wine sold at retail in Southern California is sold in chain stores.”

The consolidation at the retail level, he said, like the conversion of Safeway stores to Vons in Southern California, has placed even greater buying power in the hands of some chains at the expense of independent wine shops that can’t compete in terms of buying power and price.

Moreover, he said, with today’s faster pace of life, consumers want to make one stop to shop for food and wine, rather than stop for groceries in one place and then stop later at a wine shop.

“We are seeing a renaissance of wine at the retail level through the growing sophistication of the grocery chains,” Wilson said. But, he added, one thing lacking at the supermarket level is the personal service offered by independent stores.