RED, WHITE and ROBUST : Demand Surges for California Wines

Vintners in the famed Napa Valley get giddy when they contemplate the growing cadre of customers like Suzanne Patmore.

The entertainment industry executive used to spend no more than $10 for a bottle of wine. Yet there she was on a recent Friday night, clutching a wine magazine’s list of recommendations as she strolled the aisles of a chic liquor shop in West Los Angeles, scrutinizing labels on bottles marked $20 and up.

“I’m sort of branching out to decent stuff, to things that actually rate on the Wine Spectator scale,” said Patmore, 28, as she stood in line at Wally’s. “I’m trying to start a wine cellar, and for the first time I’m buying wines costing $30.”

Attitudes like hers are making for heady times in Napa Valley and adjacent Sonoma County, the center of California’s booming premium wine trade.

Customers once content with $5 to $10 bottles are trading up, up, up. As a result, demand for better California wines is soaring like a hot-air balloon in one of Napa’s misty dawns. And the wine country is giving off a piquant bouquet of prosperity and optimism.

Savvy shoppers are finding that the plentiful bargains of recent years, designed to dry up an ocean of excess wine, are history--at least for now. Prices in many categories are ratcheting up, especially on such hard-to-find varieties as Merlot, an increasingly popular red wine.

And price increases of 5% to 10% might be in store for next year and beyond, when vintners release wines produced from the high-quality 1995 harvest, which was diminished by the ferocious rains of last winter and spring.

After a difficult decade--much of it spent replanting vineyards in an effort to eradicate a ruinous pest--winery owners are reaping the benefits of vast improvements in quality and years of campaigning to get more space on retailer shelves and restaurant wine lists.

“It’s an exuberant time,” said John Skupny, vice president and general manager of Niebaum-Coppola Estate Winery in Rutherford, owned by director Francis Ford Coppola. “It’s all starting to pay off.”

*

Thanks to growth in premium segments, particularly reds, the California table wine industry in 1994 and 1995 enjoyed its best years since the mid-1980s--even though overall consumption of wine, particularly wine coolers, is declining in the United States.

Adding zest to the surge is a wave of favorable publicity touting the health benefits of moderate consumption of alcohol, particularly red wine. In an about-face bound to give a further boost to sales, the federal government acknowledged for the first time earlier this month that one or two drinks a day might lower the risk of heart attacks.

It isn’t an unbounded windfall for the wine industry, of course. Vintners’ costs for grapes, barrels, bottles, corks and labels are also shooting up. And there is concern that unfettered price boosts could prompt hard-won customers to turn to cheaper wines from other states or overseas. Meanwhile, dwindling supplies have forced some wineries to ration sales, a practice that upsets retailers.

Despite all that, the chief lament of most winery owners these days seems to be that they can’t put their hands on enough quality juice to sate the public’s increasing appetite. Mother Nature gets much of the blame.

After last winter’s torrential rains, vintners prayed for a warm, sunny spring and early summer. What they got was more downpours--and, unbelievably, hail in June.

When Doug Shafer saw how many of the tender flowers on his vines had gotten “shattered,” he started scrambling. By early September, he was frantically offering growers $2,500 for a ton of merlot grapes--a crop that normally would have sold for $1,800. Growers thought he was tipsy.

“There was nothing out there,” recalled Shafer, president of Shafer Vineyards, the winery founded in 1972 by his father in Napa’s prestigious Stags Leap district. “I kept telling them: ‘I’m not out of my mind. I need to have this.’ ”

*

Such scenes were replayed dozens of times in the flatlands and hillsides of Napa and Sonoma, as producers hustled to offset a reduced harvest at a time when demand for premium California wines has never been more robust.

The good news was that a warm October made the crop come in beautifully. And wineries are well aware that a couple of years of somewhat lower production could help strengthen their hand after a long period of oversupply and price discounting.

Already, the greater desire for higher-priced wines in the last two years has had a salutary effect on winery bottom lines, which had suffered because of costly replantings to stem the spread of phylloxera, a bug that has killed thousands of acres of vines by devouring their roots.

“It’s common to see wineries with 25% increases in sales and 50% increases in profits,” said Vic Motto, a principal with Motto, Kryla & Fisher, a wine country consulting firm in St. Helena. And the prospect of continuing stability in pricing--or even higher prices--puts smiles on vintners’ faces after years of difficulties.

Until quite recently, California’s wineries were doing battle on a number of fronts. In the early 1990s, they were faced with a vocal anti-alcohol movement, recession, higher taxes and health concerns.

In addition, a 1991 study by the Bureau of Alcohol, Tobacco and Firearms, the federal regulatory agency overseeing the industry, showed potentially dangerous levels of lead in some domestic and foreign wines. One result was that wineries immediately set about finding alternatives for the lead foil wrappers that had traditionally been used on bottles to cover the corks.

A couple of years before, beleaguered vintners and growers had begun noticing shriveled leaves on their grapevines--the early effects of phylloxera. They began a massive replanting effort that is still underway. Many good vineyards will be out of production for several years.

*

The tide started turning in 1991, when a “60 Minutes” segment spotlighted scientific theories linking moderate drinking of red wine to improved health in France. That news was bolstered last November, when the same CBS television program reported on new studies in Denmark showing a link between longer, healthier lives and moderate drinking.

In the two weeks immediately following, Americans scooped up 26% more red wine than in the same period the year before.

As Patmore, the connoisseur-in-the-making, found on her recent shopping excursion, many wineries have been out of their most popular brands for several months. Many vintners have been forced to allocate cases to ensure a steady, if reduced, supply to loyal customers.

“Wineries are looking at the long-term goal--to consistently service trade accounts and not drop off the cliff,” said Eileen Fredrikson, a principal with Gomberg, Fredrikson & Associates, a San Francisco research and consulting firm that focuses on wine industry economics.

The practice nonetheless riles some retailers, who bemoan lost sales at a time of raging demand.

Wine Club, a discount warehouse operation with outlets in Santa Ana, San Francisco and Santa Clara, was miffed when its allocation of the high-end Opus One (a joint venture of Robert Mondavi Winery and Chateau Mouton-Rothschild) was cut in half. In another instance, Wine Club is getting just 10% of the “special select” wines that it used to receive from Caymus Vineyards.

Back in November, Dennis Groth, owner of Groth Vineyards & Winery in Oakville, notified distributors that he had run out of Sauvignon Blanc and would be unable to fill any more retailer orders until May. The company is also concentrating on maintaining its place on restaurant wine lists, even at the expense of losing shelf space in retail outlets.

“Everybody’s running out of wine,” Groth said. “Retailers are finding you can’t supply demand on an as-wanted basis.”

Groth, who bottles a relatively modest 40,000 cases a year, is even seeing more vintages being released early. He has spied some 1993 Cabernet Sauvignon on the market before his own ’93 vintage has even been bottled. Such a practice could end up backfiring on the industry, he said, if too many “undrinkable” wines get into consumers’ hands.

As demand continues to outstrip supply of wines--particularly those costing $7 or more--it is tempting for wineries to bump up prices to whatever the market might bear. After production costs soared, Mondavi recently raised the price of a magnum of Woodbridge Chardonnay to $12.99 from $9.99.

“We held our breath, but sales have increased 50%,” said Martin Johnson, senior vice president of marketing at Mondavi.

With producers in such command of the market, can price gouging be far behind? Most winery owners and consultants agree that this kind of approach would be shortsighted after all the trouble the industry has endured to win over its clientele.

“People could jump to the conclusion that vintners will take advantage of this opportunity to gouge consumers and make up for past losses,” said Michaela Rodeno, chief executive of St. Supery, a French-owned winery in Rutherford. “[But] everybody [in the premium wine business] understands it’s an extremely long-term proposition. You work hard to develop fans. Even if you have a big, fat opportunity, you’d be a fool to take advantage of it.”

St. Supery plans to raise prices by an average of 5% this year, on wines that now range from $12 for Chardonnay to $16 for Merlot. But for the previous two years, the winery decided to forgo increases, figuring that the market couldn’t support them.

*

Sure enough, some retailers are starting to encounter a bit of price resistance.

Tom Jiaras, owner of the International House of Wine & Cheese in suburban Chicago, said some customers who had willingly paid $35 for a bottle of Silver Oak’s prestigious Cabernet are now saying they can buy three bottles of good wine for the same price. But in general, he said, “demand is still strong and growing, and the boutique, higher-ended wineries can do whatever they want.”

That has not been the case in the “popular premium” category--which features wines for less than $10 with such labels as Kendall-Jackson and Fetzer, a Mendocino County winery. There, fierce competition for market share has helped to keep prices stable.

But even those wineries might find it difficult to stave off increases in the face of rising costs. E&J; Gallo, the grandfather of them all, complicated matters for that segment recently with its introduction of Turning Leaf varietals, which are selling at rock-bottom prices in many stores.

The danger in boosting prices is that casual wine drinkers who aren’t label conscious might switch to the burgeoning supply of lower-cost imports from Chile, South Africa, Australia and elsewhere. For many wine drinkers, after all, much of the fun is in experimentation and variety.

For big players such as Mondavi, one key is using marketing dollars to carefully explain products to potential customers. Mondavi is advertising in upscale magazines such as Gourmet and the New Yorker and on radio.

“There are 1,400 Chardonnays in California,” Johnson said. “With that much clutter, you’re going to have people that are just confused. Our plan is to educate people about the quality orientation in general.”

That is hardly an easy task. Even though Los Angeles is the largest table wine market in the country and the West Coast has embraced wine as part of its lifestyle, the United States as a whole is still not a wine-drinking nation.

According to the Wine Institute, an industry trade group in San Francisco, consumption of all wine in this country has declined in the last decade and remains well below that of most other major wine-producing nations.

*

In 1992, the most recent year for which global figures exist, U.S. per-capita consumption was 1.86 gallons, contrasted with 17.04 gallons in France, 15.94 gallons in Italy and 6.75 gallons in Denmark. U.S. per-capita consumption declined in 1994, to 1.76 gallons, reflecting a shift to premium from jug wines and the decline of wine coolers.

Although efforts are underway, the industry has yet to launch a wholesale marketing assault to attract new customers. Attempting to promote the health benefits is too tricky and delicate an issue, many winery owners say, and the diverse parts of the industry have not yet been able to agree on a plan.

“What we really need is an industry program like ‘Got Milk?’ ” said Johnson of Mondavi, referring to the hugely successful milk campaign.

But such issues are not enough to dampen vintners’ spirits in these flush times.

“My advice to consumers would be to buy cases of ‘90, ’91 and ’92 Cabernets and put them in their cellars,” said E. Michael Moone, owner of Luna Vineyards in Napa and an investor in the recently announced purchase of Beringer Vineyards and other wine holdings from Nestle. “Collectors are out there now scrambling for upper-end wines. There will be some intense feeding.”

Days of Wine and Rises

Wine sales nationwide increased in all price ranges last year, but they grew especially fast at the more expensive end.

*--*

Cost per bottle Sales volume Annual increase (millions) $3 & below: 543 3% 3-4.99: 634 8 5-6.99: 323 16 7-8.99: 133 19 9-12.99: 175 26 13 & up: 46 16

*--*

Source: WineScan, a joint venture of A.C. Nielsen and the Promotion Information Bureau, using checkout scanner data from 3,200 food stores with more than $2 million in annual sales each. Annual sales are for the 52 weeks ended Dec. 23