In a Maturing Wine Industry, Distribution Is Everything

A decade ago, this valley’s future looked as unlimited as its vine-studded horizon. New wineries were sprouting almost as fast as vineyards were expanding.

The yuppie generation had selected California Chardonnay as its beverage de rigueur. And the wine business talked of Americans adopting the habits of the French, even sipping vin ordinaire with their french fries.

But as the 1990 grape harvest begins here, so does an era of reduced expectations. U.S. wine consumption has dropped slightly in each of the past two years. Sales of jug wines and coolers are down. The only significant growth has been in premium wines, but that’s mostly due to people trading up to more expensive labels----not buying more wine. Liquor distributors have been consolidating, making it much more difficult and expensive for smaller wineries to get their product to market.

Meantime, an ocean of Chardonnay is about to flood the market, the result of vines planted several years ago before people quit drinking as much wine. Consumers should soon see lower prices on some high-quality wines.

The industry’s pessimists read all this and predict consolidations, bankruptcies and forced sales of wineries that are unable to compete under the tougher circumstances. There is ominous evidence that this is already beginning.

But the optimists say as long as California continues to improve the quality of its wine--and over the past 20 years it has come to rival the French--sales and profits will take care of themselves; there may be ups and downs, but the world will always buy quality, they say.

Either way, the reality of cutthroat competition in a maturing industry has supplanted the fantasy of genteel life in a Napa Valley vineyard.

The rhetoric used these days by wine industry experts hits you like a splash of sparkling water. “Contrary to the hopes of many vintners and despite substantial investments by major consumer goods companies in the 1970s and early 1980s, wine has not become an everyday part of American life,” industry analyst Jean-Michel Valette of Hambrecht & Quist wrote in a report last month. “It is still consumed primarily on special occasions or when dining out--times when the package is being consumed just as much as the contents. Jug wines simply do not fulfill a growing number of consumers’ image-based needs.”

Two decades ago, California had little pretense of competing with the world’s best wine producers. It made mostly good-quality bulk wines, the kind sold in jugs at relatively low prices. But, with the help of research done by agriculture experts at UC Davis, the quality of California grapes and wines improved dramatically.

Money from banks and investors started to pour into the industry. Premium wineries in the Napa Valley became a prestige investment, and the price of Napa vineyards soared; the number of wineries in the state skyrocketed past 800. And, because of liberal tax laws that permitted big investment writeoffs, it was possible for a gentleman farmer to operate a small winery and live the good life. How much wine he produced wasn’t too important, nor was his market share or his distribution network.

In time, California wines appeared on and even dominated wine lists at fine restaurants. The money to be made in premium California wines became apparent, and even major U.S. corporations, including Coca-Cola, bought in. Most are gone now.

“In the early 1980s, people fell in love with the wine business, and they knew they could write (their costs) off,” said Jon A. Fredrikson, a San Francisco wine industry consultant. But the investment writeoffs mostly ended with tax reform in the mid-1980s, about the time the number of distributors began to shrink.

Distributors are the wholesalers who go to stores and restaurants and sell wine. A decline in their number makes it tougher for wineries with fewer brands and smaller production to find distributors willing to market their goods.

“You need multiple brands and at least 200,000 cases a year to make it today,” said Donald D. Bade, president of Santa Rosa-based Vintech Wine Group, which is forming a “collection” of investor-owned premium wineries with a common marketing and distribution network. By comparison, many of the small wineries that started a decade ago used to be content turning out 25,000 cases a year, or perhaps even less.

Bade predicts that some small wineries will close over the next several years after searching fruitlessly for distributors or investment partners. “Three years ago we had a hard time finding any wineries for sale,” he said. “Now hardly a week goes by that we don’t hear from somebody interested in selling out.”

Fredrikson, too, has been hearing lately from wineries that need capital to expand production to meet the new economics of the Napa Valley. “It’s a maturing business,” he said.

Jug wine producers consolidated long ago, leaving giant E. & J. Gallo far above all the others. And the low-end premium winemakers--those that sell products for $3 to $7 per bottle--also did so several years ago, leaving Gallo, Sebastiani, Sutter Home, Glen Ellen and Wine World Estates the clear leaders. Now the consolidation will spread even to producers of more expensive wines, according to Valette and others.

This sobering maturity for the young California premium wine business has been forced on it by cold reality: Americans aren’t French or Italian, and they don’t drink as much wine. It no longer appears as if they will substantially increase their consumption--no matter how sophisticated they become about appellations, varieties and aging. That’s hard for some wine enthusiasts to accept, but it’s what has driven some investors from the business already.

Of course, U.S. industries have “matured” for generations. Makers of better mousetraps have been acquired by those that offer them access to capital and help with distribution. The end result is fewer mousetrap makers. It’s as American as apple pie, or in this case Napa Valley Chardonnay.

The ultimate irony may be that, while the big American firms that dabbled in California wine a decade ago got fainthearted when increased consumption failed to materialize, some of the biggest acquirers and consolidators of the state’s premium wineries recently have been European food and liquor conglomerates. Switzerland’s Nestle, for instance, bought Wine World Estates. Great Britain’s Grand Metropolitan owns Heublein Fine Wines, and Allied-Lyons, also of Great Britain, owns Wine Alliance.

The wine business in Europe “matured” long ago. There is virtually no more land available for expansion; vineyards here seem like a bargain, and even the Europeans admit that California wines are now comparable to their own.

European winemakers learned long ago what the Napa Valley is just now learning: Quality being about equal, he who has distribution has everything.

TRADING UP While U.S. wine consumption has been flat . . . Annual U.S. wine consumption, in gallons per capita 1889: 0.61 1914: 0.53 1934: 0.26 1945: 0.71 1960: 0.91 1970: 1.31 1980: 2.13 1990: 2.11 . . . Market share of California premium wines has jumped. California premiums: 4% Imports: 25% Other: 6% California jug wines: 65% Other: 4% Imports: 17% California premiums: 22% California jug wines: 57% Source: Gomberg, Fredrikson & Associates