California Vintners Say Time Is Ripe to Enter Growing Global Markets

In the rolling hills of Geyserville, Calif., Kendall-Jackson Wine Estates is bottling the first cases of a new wine--soft and fruity with just a hint of spice--that it sees as critical to the future of California’s wine industry.

It’s called Collage--and with good reason. Instead of being made from a single variety of grape, such as cabernet or chardonnay, it is blended from a mix of grapes grown on the lower-cost outskirts of the wine country in Lake and Mendocino counties.

Nobody in this country will ever taste it. Instead, after spending decades trying to create an elite image for themselves to compete against the sophisticated wines of France and Spain, California vintners are now discovering that they have to aim lower as well and create a soft, fruity, universally appealing wine that can be sold at a reasonable price--between $7 to $9 a bottle--almost anywhere in the world.

“It’s not just what wineries want to make, but what consumers would want them to make,” said Richard Castaldi, a San Francisco State University professor studying the globalization of the California wine business.

No one will mistake this wine for a Chateau-Lafite Rothschild or Opus One, but it is tasty, consistent and critical to California winemakers’ plans to globalize amid an impending grape glut, plateauing domestic consumption and increasing competition from savvy producers in such countries as Australia, Chile and South Africa.

“The question really becomes: Will we support and develop this market, or lose it?” Lew Platt, chief executive of Kendall-Jackson, recently asked a group of fellow winemakers. “It’s too late for the U.S. to isolate itself.”

While consumption in the mature U.S. wine market edged up just 5% between 1996 and 1998, mainly among older drinkers, consumption in the United Kingdom increased 11%, it grew 17% in Canada, and it surged a whopping 83% in Japan, according to the Wine Institute, a U.S. industry trade group.

Until now, California winemakers have only dabbled in the global market. Exports accounted for just 11% of all California industry sales in 1999, according to Gomberg Fredrikson & Associates.

And only a handful of U.S. producers are doing it in any significant way, including E. & J. Gallo Winery, Robert Mondavi Corp. and Canandaigua Brands Inc. Although 140 California wineries claim they ship overseas, only 15 account for 98% of that business, according to Castaldi.

And that’s not likely to change very much. Only the largest companies, analysts say, will have the financial wherewithal and distribution networks to exploit global markets. That factor has driven several California winemakers in the last week to agree to acquisitions by large global wine and spirits companies. Witness Beringer Wine Estates Holdings Inc., which agreed to be acquired for $1.5 billion by Australia’s largest beer maker, Foster’s Brewing Group Ltd.

Kendall-Jackson tried to negotiate its own deal with Beringer and Australia’s largest wine marketer, Southcorp Inc. Although that deal fell through, Platt still seeks a global partner, and there has been some speculation that it could still involve Southcorp.

The fact that Platt, former chairman of global computer giant Hewlett-Packard Co., was hired in November to head Kendall-Jackson is testament to how desperate the industry is to go global. With 33 years at HP, Platt’s wine experience was mainly limited to stocking his own cellar.

But he, perhaps better than anyone in this insular industry, knows what’s needed to go global. More than half of HP’s sales are overseas, and he conducted business for decades in markets such as Singapore, China and Russia.

Most important to tapping global markets, he says, is producing a consistently good wine and pricing it so that people are willing to try it.

To lower production costs, Platt is not only turning to so-called fringe areas within California, but he’s also turning to much-lower-cost grape-growing areas in South America.

Kendall-Jackson has invested millions to plant vineyards and build state-of-the-art wineries in Argentina and Chile. It’s ripped up vineyards of sangiovese grapes in Tuscany, replanting California’s best-selling varieties such as cabernet and merlot. And Platt is now looking for new wineries or vineyard properties in Australia and New Zealand.

Although Kendall-Jackson exports account for only 3% of its business now, by the end of the decade Platt hopes to push up exports to 30% of its business, as it reaches out to developed markets in Europe and Asia and to countries such as India and China.

Ironically, much of the pressure to globalize is coming from a country with a wine industry a fraction the size of California’s: Australia.

While California winemakers were focusing on creating more expensive craft wines and constantly selling out of them domestically, Australian winemakers--saddled with an oversupply of grapes--worked to create a wine that was more universally appealing and banded together to market it worldwide.

They set up booths at big wine shows, opened trade offices in England, Ireland, Germany, New York, Japan and Scandinavia, and upped their exports to the U.S. sixfold and doubled their entire international business to $740 million last year, according to the Australian Wine Bureau.

That set off alarms with American producers who have seen Australian products gain an increasing share of supermarket shelf space and earn “Best Buy” accolades from wine industry trade publications.

And the Australians’ goal is much more ambitious: They want to rank among the world’s largest producers by the year 2025. The Winemakers Federation of Australia expects its sales by then to rise to $2.6 billion. Impressive but, Australian trade officials admit, not enough to top No. 1 producer Italy, No. 2 France and even California, which recorded $5.4 billion in sales in 1999, accounting for about 90% of U.S. wine production.

Unlike American winemakers, the Australians have worked together to raise their profile, marketing not just their own brands but the entire region.

“Winemakers were very willing to work as a whole in promoting brand Australia,” said Jan Steubing, director of the Australian Wine Bureau.

It didn’t hurt that they came up with a style of wine appealing to most wine drinkers: a light, “fruit-forward” wine that is soft, low in acidity and with a $6 to $9 price tag attractive to consumers just starting to experiment with different varieties of wine from different regions.

By blending grapes, Australian winemakers also keep costs down and their wine consistent, regardless of weather or soil conditions, a move that Kendall-Jackson mimics with its Collage wines.

Much of Australia’s wines are made from a combination of grape varieties such as cabernet/shiraz and merlot/cabernet. And they’re often made from grapes spread out over vineyards hundreds and even thousands of miles away. But remarkably, they are blended and aged with enough precision to create a wine that almost always tastes the same.

“The best word used to describe [our] $7 to $9 bottles of wine is consistency,” said Tim Matz, a senior vice president of Southcorp. “The consumer has come to realize that they can depend on this brand year in and year out.”

Sales of Southcorp’s best-selling wine, Lindemans Chardonnay Bin 65, blended from grapes grown in 30 different areas, jumped 25% in North America in the last year. And sales to Europe have skyrocketed 35%. Over the next few years, Matz expects Lindemans sales to double.

Australian wine producer Rosemount has become so good at marketing to U.S. consumers, it’s even more popular here than in its own country, Steubing says.

But some industry players say that following Australia’s example with less expensive varietal wines may be the wrong way to go. Companies such as Robert Mondavi and R.H. Phillips Inc. are shooting for the high end, trading on the cachet of California’s prestigious winemaking regions and using international partners to help push their wines overseas.

Premium winemaker R.H. Phillips agreed this week to be acquired by Vincor International Inc., Canada’s largest winemaker, for $92 million. Vincor is seeking broader distribution in the U.S.

Mondavi is building a winery in the Languedoc region of France. It’s also forging alliances with other prestigious wine families around the globe, such as the Frescobaldis of Italy and the Rothschilds of France, to introduce new styles of wines in these areas.

Although almost everyone is trying to find a universally appealing wine, no one’s actually done it, says Greg Evans, Mondavi chief operating officer.

Mondavi’s Twin Oaks wine, an $8 promotional wine that shoppers here have probably never seen on supermarket shelves, is inexplicably one of its biggest sellers in Europe.

What’s certain, he says, is that California winemakers must be a lot bigger not only to survive and compete with other global players, but also to keep up with the retailers that will stock them.

Eventually, professor Castaldi says, the U.S. wine business may resemble other industries, such as airlines or automobiles, with just a handful of major players.

But unlike the auto industry, Castaldi says, the base of these companies’ operations will be so large and diverse, they won’t really have a place to consider home.