Two Buck Chuck Has Mondavi Over a Barrel

Two Buck Chuck still is casting his shadow over California’s wine industry.

On Thursday, Robert Mondavi Corp., the state’s largest publicly traded wine company, reported a 90% drop in its fiscal fourth-quarter profit. The main culprit: The doggedly popular $1.99-a-bottle Charles Shaw brand sold at Trader Joe’s grocery stores.

Even worse for Mondavi, Charles Shaw has spawned clones.

Company executives acknowledged that what they called “the super-value wine category” ate into sales of Mondavi’s well-regarded Woodbridge table wine label, which suffered a year-over-year sales decline of 26% in California.

Trader Joe’s began stocking Two Buck Chuck, as consumers know it, last summer, and now most of the large supermarket chains have their own $1.99 offerings of nicely bottled bulk wine, the kind that used to be packaged in plastic-lined boxes.

All told, Californians in the first half of the year purchased nearly 3.5 million cases of $1.99 wine, and that represented about one out of every five domestically produced bottles, said Rich Cartiere, editor of Napa Valley’s Wine Market Report.

Compounding woes for Mondavi is a flood of less expensive Australian and Italian brands that have been commanding more and more shelf space.

Imports and inexpensive domestic offerings aren’t problems only for Mondavi. In fact, the company’s latest financial results are a window onto what plagues California’s $13.5-billion wine industry:

* Too much wine: Mondavi posted a $4-million write-down of the value of its bulk wine inventory.

* Too many employees: Mondavi spent $2.9 million on employee-layoff expenses in the most recent quarter.

* Too many acres of grapes: Mondavi took a $1.2-million write-down to buy out grape- purchasing contracts.

In the quarter, net income was $1 million, or 6 cents a share, down from $10.2 million, or 62 cents, a year ago. Revenue slid 3% to $120.8 million for the period ended June 30.

For its fiscal 2003, the company was able to squeeze out a small gain in sales -- they were up 3% to $452.7 million. Full-year profit fell 32% to $17.3 million, or $1.06 a share, from $25.5 million, or $1.56, in fiscal 2002.

“Mondavi is being hit pretty hard as people go from a $5 to $7 bottle of its Woodbridge wine to a $2 bottle of Shaw,” Cartiere said.

The winemaker is known for its premium Mondavi label, including its $40 Carneros Pinot Noir and its $150 Kalon Vineyard Reserve Cabernet Sauvignon. But Woodbridge is the main driver at the Oakville, Calif.-based company, accounting for 55% of revenue and about 75% of sales volume.

“The Woodbridge business is still one that we need to turn around,” Gregory Evans, the company’s chief executive, said during a conference call with investors and Wall Street analysts Thursday.

The label’s decline was especially keen in California, where Woodbridge and Bronco Wine Co.’s Charles Shaw compete head to head. Mondavi doesn’t see that competition cooling off.

“Our view is that super-value wines will be here, particularly in California, for the foreseeable future and as long as there is a surplus of grapes,” said Robert Philipps, a Mondavi vice president.

The overplanting of vineyards in Central and Northern California led to a surfeit of wine grapes starting about three years ago, and that drove down prices. Much of the surplus has been turned into bulk wine a la Charles Shaw.

Industry experts expect the glut will dry out, but they’re divided over when.

“We think this is probably a two-year phenomenon, after which we think the economics that support these low prices will go away as supply comes into balance with demand,” Philipps said.

Bill Turrentine, president of Turrentine Wine Brokerage, a company that sells about $100 million a year in wine grapes and bulk wine, said the surplus is starting to thin out, especially of Merlot and Chardonnay varietals. However, there still are more than enough Cabernet, Pinot Noir and Syrah grapes.

The industry looks to get a break from Mother Nature this year. Cartiere estimates that the harvest that starts this summer will come in at 3 million tons -- the lowest in five years.

Meanwhile, growers removed some 32,000 acres of vines during the first half of this year, mostly in the Central Valley, the source of much of the low-priced California wine. On the other hand, a similar number of grapevines has at the same time come into production, mostly in the coastal wine-growing regions, Cartiere said.

“In truth, no one really knows at this point how much surplus wine is out there,” he said. “What we do know is that you can still buy it cheap, in some cases for $1.50 to $2 a gallon.”

Though Mondavi has struggled in the table-wine category this year, it did better than expected selling its more expensive brands in the latest quarter.

“We think our fourth-quarter performance is beginning to show some positive trends,” especially when sales to restaurants are factored in, said Chairman R. Michael Mondavi.

Wall Street seemed relieved that the numbers weren’t gloomier. The company’s shares rose $1.90, or 8%, to $24.99 on Nasdaq. Even with that gain, Mondavi’s shares have fallen 19% this year.

“There’s nothing here to indicate that great times are ahead,” said Bud Leedom, an analyst with Wells Fargo Securities in San Diego. “But the expectations for the company were pretty low, and people were relieved that the news was not any worse.”