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The California Wine Industry Giannini Foundation of Agricultural Economics Giannini Foundation of Agricultural Economics The California Wine Industry: Entering a New Era? by Philip Martin and Dale Heien The California wine industry is fragmenting into larger and smaller units to reflect the evolving consumer market in which sales of relatively expensive and relatively cheap wine are growing fastest. The future may be one of large wineries with many labels and small wineries that sell most of their wine to retail consumers. n September 2002, California grape growers Paradox, the fact that moderate consumers of red wine picketed a Gallo grape-receiving facility in have less coronary heart disease. Better quality table IFresno, protesting the $65 a ton offered for their wine consumption rose sharply in the 1990s (Table grapes– just enough to cover picking costs. Meanwhile, 1). Wines carrying labels like Chablis or Burgundy swank restaurants served wines made from Napa and classified as jug wine fell from 65 percent of cabernet grapes worth $3,700 a ton. The wine industry consumption in 1991 to 36 percent in 2001, while in California and the world is entering a new era, as wines costing $7 a bottle or more were nine percent many people drink less but better wine. Will producers of sales in 1991 and 28 percent of sales in 2001. The of lower-priced grapes raise their quality enough to average price of a bottle in inflation-adjusted prices attract more upscale wine drinkers, putting downward rose from $3.50 in 1991 to $4.60 in 2001, an increase pressure on all grape and wine prices, or will the wine of 2.5 percent annually, which led to the mantra that grape industry continue to fragment into distinct consumers were drinking “less but better.” There are quality and price segments, allowing one segment to about as many cases of popular-premium or fighting prosper while another languishes? varietal wines sold as jug wines sold. These changes have their origin in 1976 when a Higher grape and wine prices have led to increased blind tasting pitted several California wines against top plantings, especially in coastal areas associated with French vintages. To the eternal chagrin of the (French) higher-priced wine grapes. At the beginning of the wine judges the California wines—Stag’s Leap Cabernet and boom in the late 1970s, producer prices for wine grapes Chateau Montelena Chardonnay—were voted supe- rose in all areas, but increased production in the 1980s rior. American consumers in the 1980s and 1990s took led to lower prices and reduced acreage— acreage fell a new interest in wine and the lifestyle associated with fine wine and food. This Table 1. U.S. Wine Consumption new interest increased consumer appre- by Retail Price (750 ml bottle),1991-2001 ciation of the fact that the taste of wine Retail Price 1991 1995 1998 1999 2000 2001 reflects where the grapes are grown and Cases Sold (millions) how the wine is made. Changing con- sumption patterns, the consolidation Ultra-Premium Over $14 2.4 3 5.5 10.1 14.4 14.8 of production, and the globalization of Super-Premium $7 to $14 7.1 10.1 21.4 24.5 24.5 26.4 sales and tastes are causing the recon- Popular-Premium $3 to $7 28.1 34.5 48.1 49.5 52.6 51.3 figuration of the California, and world, Jug Wine Below $3 69.2 69.4 67.8 65.7 55 52.6 wine economy. Total Table Wine Mil cases 106.8 117 142.8 149.8 146.5 145.1 Consumption: Less but Better Average Price Table wine $3.44 $3.88 $4.60 $5.21 $5.88 $5.96 Percent of Total Volume U.S. wine drinkers have upgraded their tastes over the past quarter Ultra-Premium Over $14 2% 3% 4% 7% 10% 10% century, as baby boomers with leisure Super-Premium $7 to $14 7% 9% 15% 16% 17% 18% time and money began to explore wine. Popular-Premium $3 to $7 26% 30% 34% 33% 36% 36% Consumption of cheaper table wines, Jug Wine Below $3 65% 59% 47% 44% 37% 36% those costing $3 a bottle or less, was Source: Selected Gomberg-Fredrickson Reports stable during the 1980’s. In November * Weighted average price is based on midpoint prices for each category times the share 1991, the CBS television program 60 of total cases in each category. Retail price categories and weighted average prices are Minutes aired a segment on the French not adjusted for inflation. 4 5 Giannini Foundation of Agricultural Economics Giannini Foundation of Agricultural Economics Table 2. California Winegrape fastest growth in the North and Central Coast areas (Table 3). Non-bearing acreage increased even faster, Varieties, 1972 and 2001 although the exact amount of non-bearing acreage Percent of acreage 1972 2001 remains uncertain because some growers have not Carignane 12% Chardonnay 21% fully reported their acreage. French Colombard 10% Cabernet Sauvignon 15% In 2001-02, the increased supply of grapes and Zinfandel 9% Merlot 11% recession led to declining prices for winegrapes in all Grenache 7% Zinfandel 10% areas except the North Coast. In the southern San Joa- Barbera 6% French Colombard 8% quin Valley, the result was extremely low prices, which prompted the protests at Gallo. Thompson Seedless, Top 5 44% 63% which make-up over 60 percent of the grape acreage Source: Grape Acreage Report, California Agricultural in the southern San Joaquin Valley (Madera, Fresno Statistics Service, http://www.nass.usda.gov/ca/ and Tulare counties), can be marketed as table grapes, dried into raisins, or crushed to make wine or grape ten percent between 1982 and 1991. As the dollar rose juice concentrate, a natural sweetener added to soft in value in the 1980s, wine imports surged, achieving a drinks and confectionery products. Many southern 27 percent market share in 1984. During the late 1980s, San Joaquin Valley growers do not have contracts with the California wine industry again began to expand, wineries, which explains why they were protesting low but this time growers planted varietal grapes such spot market prices in 2002. as Chardonnay, Zinfandel, Cabernet Sauvignon and Merlot. The top five wine grape varieties accounted Consolidation for 44 percent of the acreage in 1972 and 63 percent in The farm and food industries are consolidating so 1997, but only French Colombard and Zinfandel were that fewer and larger firms account for an increased among the top five in both years (Table 2). share of the total sales. The same squeeze on mid- Winegrape production methods also changed. In the sized players is occurring in the wine industry. The early 1970s, most growers planted vines in rows that top three wineries, Gallo, Canadaigua and The Wine were 10 to 12 feet apart, which reduced disease risks Group, account for over 60 percent of U.S. wine ship- by increasing air circulation but also limited yields on ments. In the current consolidation, larger wineries are what was becoming more expensive land. The most buying smaller ones, in part to improve their bargain- common trellis system had three wires: one for the ing position with retailers such as Costco. For example, irrigation hose; one for the cordon or vine; and a “catch Constellation Brands owns Canandaigua Wine Co, the wire” to support the vine’s foliage. During the 1990s, second largest wine producer after E & J Gallo, as well trellises became more complex, often having wires to as Franciscian Estates, giving it a total of 51 brands guide the shoots upward and thereby foster growth and in 14 market categories, including Almaden, Cribari, facilitate exposure to sunlight. Grape clusters that are Inglenook, Paul Masson, Taylor California Cellers, slow to ripen are removed, intensifying the flavor of Nathanson Creek, Dunnewood, Talus, Manischewitz, the wine produced from the remaining clusters. Cook’s and Taylor Sparkling wine, and Wild Irish Rose. Grape growers have become more sensitive to ter- Diageo owns BV, Domain Chandon and Dom Perignon, roir or local conditions. Rootstocks have been devel- while The Wine Group owns Glen Ellen, Franzia and oped for particular areas, so that the vines have more Mogen David. Consolidation enables one producer to disease resistance or drought tolerance, suggesting that market many labels, thus gaining shelf space in retail parts of California may develop a French-style system stores and facilitating exports and joint ventures. that associates specific grape varieties with particular Mid-size wineries are at a competitive disadvantage areas, such as Cabernet in the Napa Valley, Chardon- vis-à-vis both larger and smaller ones. Small wineries nay in the Carneros area of Napa and Sonoma counties, in areas frequented by tourists can sell wine directly to and Zinfandel in the foothill counties. consumers through their tasting rooms, thereby elimi- During the 1990s, the demand for wine increased, nating middlemen and retailer markups. For example, and some wineries offered growers multi-year “plant- the Napa Valley has 300 wineries, a third of the winer- ing contracts” with guaranteed prices. Plantings ies in California, and most sell much of their wine to increased 48 percent between 1991 and 2001, with the visitors. Mid-sized wineries, by contrast, must often 6 7 Giannini Foundation of Agricultural Economics Giannini Foundation of Agricultural Economics sell their wine via middlemen who can have consider- percent of the wine it produces. The import share of able market power under state laws regulating alcohol U.S. wines has a V-shape: imports were 25 percent of sales. In the traditional three-tiered marketing system the volume of U.S.
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