California’s Wine Glass Overfilled

First came the dot-com bust, wiping out their big-spending Silicon Valley customers.

Then, the sobering attacks of Sept. 11 almost brought their sales to a standstill.

Even now, with a sluggish economy depressing demand and a global grape glut threatening to flood the U.S. market, California’s luxury winemakers refuse to admit that the party’s over.

Unwilling to risk their cachet and profit margins, many in California’s $33-billion wine industry are resisting lowering the price of their wines, even as unsold cases of Cabernet and Chardonnay pile up in warehouses and foreign wines win a bigger share of U.S. customers.

“I’m shocked that prices aren’t half of what they were last year,” said Rich Cartiere, editor and publisher of the Wine Market Report, a Calistoga, Calif.-based industry newsletter. “We are entering a period of hyper-competition. There is an enormous worldwide supply of wine and the [California] wine industry has just not adjusted. Reality has not yet set in for everybody.”

Although some winemakers have reacted to the glut by shaving a few dollars off their $7-to-$12 California Chardonnays and Cabs, wineries with more-expensive labels are socking away cases to wait for a better market.

But the wait might be a long one. California wine grape growers are turning out 52% more grapes today than just seven years ago, while countries such as Australia, Chile, Argentina and South Africa are exporting more wines to the U.S. than ever before.

All this is helping to saturate the U.S. wine market. Wine analysts say it could take five years to work through this supply, especially because wine sales in the U.S. are flattening. In the process, a number of smaller California growers will be forced out of business as the glut of grapes keeps prices low.

No one will have to work harder to move their wines than California’s high-end winemakers, which have watched their business plummet in the last year as consumers cut back on travel and white-tablecloth dinners, and in general buy less wine or lower-priced varieties.

Yet many winemakers refuse to discount their goods, either because they have high land costs or are afraid they will tarnish their image and not be able to command the same lavish prices when supply and demand fall back into balance.

Robert Mondavi Inc., for example, does not plan to lower the price of its luxury wines, despite slowing sales. Instead the Oakville-based winery, whose sales declined 8% in fiscal 2002 from the previous year, is giving economic incentives to distributors to push its wines.

Beringer Blass Wine Estates, a unit of beverage giant Foster’s Group Ltd., is actually raising prices, funneling excess Chardonnay grapes from its Santa Barbara County Meridian vineyard into an even pricier new label called White Hills, set to debut this month.

But that will be the exception rather than the rule, analysts say.

Most large winemakers may not have a choice about discounting, given the amount of good-quality, affordable wine flooding in from around the world.

Even before this year’s harvest began last month, the pace of domestic wine sales in supermarkets, drugstores and discounters had begun to slow, inching up a paltry 1.4% in the 52 weeks ended July 14, according to Chicago-based Information Resources Inc.

Meanwhile, sales of Australian, Italian and other imported wines shot up 12.5% in the same period, according to IRI, upping their share of all U.S. wine sales to 17.9% from 16.7% the year before.

“This will be a defining year for most producers here in California when you combine the excess inventory that’s out there ... and the economic slump across the board,” said George Rose, a spokesman for British beverage giant Allied Domecq, which owns such brands as Clos du Bois, Buena Vista, Callaway and Mumm Cuvee Napa. “The bubble has definitely burst.”

Unlike some of its luxury wine competitors, Allied Domecq has begun trimming a few dollars off the prices of its Sonoma County wines to boost sales. At the same time, the company is planning lower-priced wines under new brand names to shed excess juice.

The good news for consumers is that this should mean better-quality wine at all price levels, from the $7 bottle of Sauvignon Blanc to a $120 reserve Cabernet.

“What it takes to get a 95 [top rating] in Wine Spectator today is a lot different than it was 10 years ago. And it’s going to get a lot harder,” said Jim Watkins, who heads Beringer Blass operations in the Americas.

The increase in wine quality is partly the result of growers thinning and pruning their vines to reduce production. Fewer grapes on the vine mean more intense flavor.

“[Vintners] are very excited about the fruit quality this year. It will be a tremendous vintage year,” said Karen Ross, president of the California Assn. of Winegrape Growers.

But even with this pruning, California’s 2002 wine-grape crush is expected to be 3.3 million tons, about 10% larger than last year’s. That has sent grape prices plunging as much as 50% on the open market.

Especially overplanted are popular varietals Chardonnay, Cabernet and Pinot Noir. With prices coming down on these grape varieties, more are being used in blending wines, dragging down prices for other blending grapes such as Barbera and Grenache.

Cabernet grapes are selling for as little as $100 to $200 a ton on the open market, just a tenth of what some growers were getting at the market’s peak in the late 1990s, said Barry Bedwell, general manager of grape brokerage Ciatti & Co. At current prices, he said, growers are losing money.

Indeed, the state’s last wine cooperative, East Side Winery in Lodi, went under and its assets were sold at auction two weeks ago.

Although growers may be able to swallow another year’s worth of losses, it’s unlikely they can do it for several years running.

“Last year was the strong punch in the stomach” as prices plummeted, Ross said. Some growers in the San Joaquin Valley already have begun looking for another crop to cultivate.

“They’ll start a [vine] pullout right after harvest,” at the end of fall, Ross said. “It’s a sad, harsh reality for farm families that have been in the grape business for many years.”

To keep up with the industry dynamics, Madera grape grower John Simpson has started working to improve the quality of his grapes. He has thinned vines and used trellises to better shade grapes from the hot San Joaquin Valley sun and develop more-subtle flavors.

He also has started his own small label, Simpson Meadows. Although just a small part of his business, it quickly is becoming a source of great pride and attention. Simpson Meadows Chardonnay recently won a gold medal in the $10-and-under category at a San Francisco Bay Area wine-tasting event.

“It’s still in its infancy,” Simpson said. “But we’re very happy about it.”

Ross believes that some California winemakers, particularly producers of lower-priced wines from the Central Coast and northern San Joaquin Valley, finally can compete with Australian, New Zealand, Chilean and French producers in export markets such as Britain, because the low price of grapes will offset higher exchange rates and tariffs.

Still, exports are a small part of the wine industry’s revenue. Last year, about $13.4 billion worth of California wine was sold in the U.S. California’s products accounted for most of the $541 million worth of U.S. wines exported at the wholesale level in 2001.

In years ahead, many California wines will be peddled by their Australian rivals. Conglomerates Southcorp Ltd. and Foster’s Group, both based in Australia, have made large investments in California wine in recent years. Analysts expect this type of global consolidation to continue as wine companies deal with fewer large retailers.

Medium-sized wine companies will feel the most pressure to seek a buyer or merger partner to retain a place on retail shelves.

“You just have to become more relevant to your distributor,” said Watkins of Beringer Blass, which typically has about 40 types and sizes of wine in large grocery stores.

California wine is fast becoming a smaller category on supermarket shelves. And with hundreds of new wine brands launched in recent years, winemakers are having to work harder to promote their brands, which sometimes means hitting the road for festivals, distributor dinners and tastings, and even bottle signings at the local Costco.

“We had become complacent and cocky,” said Robert Mondavi Chairman Michael Mondavi. “We in the luxury wine business have a big job to do in stimulating more consumers ... to drink our wine. Pretension is out, but there is still the means and the desire to get the top quality.”