Current Economic Trends in the California Wine Industry Rachael E. Goodhue, Richard D. Green, Dale M. Heien, and Philip L. Martin

any factors are transforming were sold in the United States in 2006, the California wine indus­ including 75 million imported cases. California’s wine industry continues try. Technical innovations in About 45 million or 17 percent of the to evolve. The number of wine grape M grape growing and wine production 270 million cases of U.S. wine shipped growers is growing slowly but the are redefining the relationship between from U.S. wineries were exported. In number of wineries has doubled in the winegrapes and the resulting wine. 2006, when there were 500,000 acres past decade. Like other food-sector firms, a combination of economic and Wine marketing is changing, as is the of winegrapes in California, the average marketing forces are encouraging structure of the wine industry. Con­ grower price was $547 a ton, making wineries to be either small enough sumers are altering their purchasing the value of the grapes in an aver­ to sell most of their wine directly to patterns. This article focuses on three age bottle of California wine $0.75. consumers or large enough to have important trends influencing the Cali­ Wine grape acreage, quantities, clout with distributors and retailers. fornia wine industry: changes in con­ and prices are reported by the state sumers’ purchasing patterns, changes for seventeen different crush districts, in the international wine market and and their diversity is reflected in the international wine grape produc­ total quantities and average prices by tion, and changes in the structure of district. Table 1 defines each crush wine and wine grape production. district. In 2006, about 30 percent of Table 1. Definitions of Crush Districts Grapes, including winegrapes, table the state’s crush was in the Fresno Crush grapes and raisins, were California’s area, district 13, followed by 18 per­ District Counties in Each District second-largest agricultural crop in cent in Stockton area, district 11. 1 Mendocino terms of revenue in 2006, generating Central Valley districts 12 and 14 2 Lake 10 percent of the state’s $31.4 billion in each accounted for another nine per­ 3 Sonoma farm sales. The 2006 wine grape crush cent of the state’s crush, while Napa 4 Napa of 3.1 million tons was sufficient to County accounted for five percent. 5 Solano make over 2.3 billion bottles of wine. The range in prices was wide, from 6 Contra Costa, Alameda, Santa Clara, In 2005, the wine grape crush was a less than $300 a ton in the San Joaquin San Mateo, Santa Cruz record 3.8 million tons; yields averaged Valley (making the grapes in a typi­ 7 Monterey, San Benito eight tons an acre. About 300 million cal bottle worth $0.40), where half of 8 San Luis Obispo, Santa Barbara, cases or 3.6 billion bottles of wine California winegrapes are produced, to Ventura 9 Del Norte, Siskiyou, Modoc, Lassen, Figure 1. Price per Ton by Crush District, 2006 Humboldt, Trinity, Shasta, Tehama, (Size of bubble represents tons crushed) Glenn, Butte, Plumas, Colusa, Sutter, 3500 Yuba, Sierra, and northern parts of Yolo and Sacramento counties 3000 4 10 Nevada, Placer, El Dorado, Amador, Calaveras, Tuolumne, and Mariposa 2500 11 Includes northern part of San Joaquin and southern part of Sacramento 2000 3 12 Includes southern part of San Joaquin 13 Includes northern part 1500 $ per Ton $ per Ton of Kings and Tulare 1 2 10 16 6 7 8 14 Includes southern part 1000 15 of Kings and Tulare 5 500 17 15 Los Angeles and San Bernardino 11 9 14 16 Riverside, Orange, Imperial, 12 13 0 and San Diego 17 Includes southern part of Yolo and -500 southwestern part of Sacramento Source: Crush Report

2 Giannini Foundation of Agricultural Economics • University of California over $3,000 a ton in the Napa Valley Figure 2. U.S. Wine Sales by Retail Price Category: 1995–2006 ($4 a bottle). Few other commodi- ties have 10-1 differences in grower 180 prices, and even wider retail price dif- 160 ferences. Figure 1 plots the average 140 price per ton of winegrapes by district 120 on the vertical axis, and arrays crush districts from the highest average price 100 per ton (Napa County, district 4) to 80 the lowest (Fresno area, district 13).

Millions of Cases of Millions 60 The size of each bubble represents the tons crushed in the district. 40 20 Consumption: Better 0 Wine, and More of It 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 Jug Wine Jug + Popular Premium Jug + Popular Premium Jug + Popular Premium Americans drink relatively little wine, + Super-Premium + Super-Premium + Ultra-Premium on average 2.4 gallons or 12 bottles a Source: Selected Gomberg-Fredrickson Reports. Retail prices for a 750 ml bottle. year, which is a tenth of what adults The volumes are “stacked,” so that the have declined in absolute volume as in France or Italy drink. Furthermore, top line, labeled Ultra-Premium, reports well as a percentage of total sales. U.S. wine consumption is concentrated total sales volume. Ultra-Premium Only the volume of wine sold in among regular wine drinkers. The 30 sales volume is the difference between each category is reported, not the million Americans who drink wine this line and the line below, labeled revenue obtained. We used the aver­ regularly drink 90 percent of the wine Super-Premium. Figure 3 reports sales age retail price of a bottle of wine in consumed in the United States, an aver­ in each category as a percentage of each of the categories (assuming $18 age of 12 gallons or 60 bottles a year. total wine sales. Consequently, unlike for the ultra-premium category, $2 There have been three important Figure 2, the effect of growth in total for the jug wine category, and the changes in U.S. wine consumption over wine sales on sales in individual price midpoints for the other categories) to the past two decades. First, Americans categories is not observed. Together, estimate nominal revenue, $5.6 bil­ upgraded their palettes, with many the two figures show that total wine lion in 1995, $10.7 billion in 2000, moving from inexpensive jug wines sales have increased in the United and $14.6 billion in 2007 (Table 2). with retail prices of less than $3 a States, and that most of the gain has Prices rose over this period (the bottle to better-quality wines costing come in higher-priced categories. Sales Consumer Price Index rose from 163 more, including popular-premium of the cheapest category, jug wine, in 1998 to 201 in 2006; an increase of wines costing $3 to $7 a bottle, super- Figure 3. Percentage of U.S. Wine Sales in Each Retail Price Category: 1995–2006 premium wines costing $7 to $14 a bottle, and ultra-premium wines 100 costing over $14 a bottle. Second, 90 consumers everywhere have come to 80 appreciate the quality of California wine, and more Americans are drink­ 70 ing especially red wine for health rea­ 60 sons. Third, Americans increasingly 50 prefer the consistent taste of fruity Percent wines produced in New World Cali- 40 fornia, Argentina, Australia, Chile, and 30 New Zealand to the “mystery in every 20 bottle” wines from Old World Europe. The industry uses four retail price 10 categories, based on a 750 ml bottle, 0 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 to classify wine. Figure 2 reports mil­ Jug Wine (below $3) Popular Premium ($3–$7) Super-Premium ($7–$14) Ultra-Premium (over $14) lions of cases sold for each category.

Giannini Foundation of Agricultural Economics • University of California 3 unfamiliar with these names, so Table 2. U.S. Wine Revenues by Price Categories, 1995-2006 they typically select a New World Retail Price 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 varietal wine rather than an Old Wine Category Implied Revenue ($millions) World “mystery in a bottle.” Ultra-Premium Over $14 648 1,188 2,182 3,110 3,197 3,413 3,694 4,061 4,428 4,752 Differences in wine styles are in Super-Premium $7 to $14 1,273 2,696 3,087 3,087 3,326 3,604 3,780 4,108 4,738 5,292 part due to differences in produc­ Pop.-Premium $3 to $7 2,070 2,886 2,970 3,156 3,078 3,168 3,150 3,180 3,270 3,396 tion techniques and the role of the Jug Wine Below $3 1,666 1,627 1,577 1,320 1,262 1,262 1,351 1,334 1,260 1,205 government in the wine industry. Total 5,656 8,398 9,815 10,673 10,864 11,447 11,975 12,683 13,696 14,645 New World wineries are often ver­ tically integrated, growing some of Wine Category Revenue Shares (Nominal) their own grapes or controlling and Ultra-Premium Over $14 11% 14% 22% 29% 29% 30% 31% 32% 32% 32% influencing grape growing practices Super-Premium $7 to $14 22% 32% 31% 29% 31% 31% 32% 32% 35% 36% with formal or informal contracts Pop.-Premium $3 to $7 37% 34% 30% 30% 28% 28% 26% 25% 24% 23% (See ARE Update Vol. 3 No. 3 for Jug Wine Below $3 29% 19% 16% 12% 12% 11% 11% 11% 9% 8% the results of a study regarding Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% contract use in the California wine Source: Selected Gomberg Fredrickson Reports and authors’ calculations. grape industry). In the Old World, 24 percent), so some of the increases the best red and white wines, encour­ there are many small grape grow­ in wine revenues were due to infla­ aging Americans interested in food and ers, and in many areas cooperatives tion. In order to assess the changes wine to drink more California wines. crush locally grown grapes. Under the in volume reported in Figure 2, we Many Americans seem to prefer the traditional geographic indicator sys­ corrected for inflation by calculat­ New World style of wine making, from tems, long lists of rules govern how ing the Paasche and Laspeyres price California, Chile, Australia, to Old grapes are grown and wine is made. indices since 1995, finding that wine World European wines. New World Greater flexibility in the choice of pro­ prices declined 7.5 percent (Paasche) wine producers aim for a consistent duction techniques, including irriga­ to 6.3 percent (Laspeyres), meaning taste across vintages of a wine made tion, means that yields are much higher that inflation-adjusted wine prices from one variety of grapes. This taste in the New World than the Old World. decreased. This decline may be one is often described as fresh and fruity, The European Union has taken reason that consumers upgraded the with an alcohol level of 13-14 percent, steps to improve the competitive posi­ quality of the wine they bought. rather than the 11-12 percent common tion of its members’ wine industries, Health considerations may also have in European countries that receive largely by subsidizing the removal contributed to increased wine sales. less sun. New World wineries that of wine grape acreage that produces The well-known “French Paradox,” blend several varieties of grapes usu­ low-quality wines, much of which is first popularized by the television pro­ ally include the percentage of each. distilled into industrial alcohol. The gram 60 Minutes in 1991, posits that the Old World European producers in European Commission has proposed moderate consumption of red wine by France, Italy, and Spain have a differ­ a loosening of rules regarding grape the French tends to offset the negative ent winemaking style. Winemakers growing and winemaking, and allow­ effects of their high-fat diet, leading to emphasize “terroir,” meaning that the ing for the simplification of wine labels. a lower heart disease rate than in the wine reflects the soil and weather where Some European growers and winemak­ United States. This positive effect of the grapes were grown, so that different ers have opted out of the traditional wine on health may have encouraged vintages can have very different tastes. system and begun to produce varietal American consumers to buy more wine. Many Old World wines need to be cel­ wines using New World techniques. lared to attain their full potential, which Trade plays a very important role New World, Old World: means they should not be drunk right in the world wine industry. Of the Taste, Production, and Trade away, even though the vast majority 300 million cases of wine sold in the The quality of California wines was of wine drunk in the United States is United States in 2006, about a quar­ recognized during the Paris surprise consumed soon after purchase. Most ter were imported. Of the 270 million of May 24, 1976. On that day, French Old World wines are blends of several cases of U.S. wine shipped from U.S. experts in a blind tasting in Paris varieties of grapes, and are often sold wineries in 2006, about 45 million ranked Stag’s Leap Cabernet Sauvignon with a geographic indicator (e.g., Bur­ cases (17 percent) were exported. and Chateau Montelena Chardonnay gundy). American consumers are often

4 Giannini Foundation of Agricultural Economics • University of California The leading source of wine imported Figure 4. U.S. Wine Shipments for Top Ten Firms and All Others (millions of cases): 2006 to the United States has shifted from the Old to the New World—imports in 40.3 E.&J. Gallo 2006 were as likely to be from Australia 4.2 Constellation Brands as Italy. Imported wines are particularly 62 5.0 The Wine Group important at lower price points: 40 Bronco Wine Company percent of wine sold for less than $10 5.5 6.0 Foster’s Wine Estates per bottle retail is imported, reflecting the popularity of brands such as Yellow 10 Trinchero Family Estates Tail from Australia. Bulk imports are Brown-Forman Wines also important, although invisible to 16 Diageo Chateau and Wine Estates the final consumer. The United States Jackson Family Wines allows wineries to blend up to 25 per­ 57 Ste. Michelle Wine Estates 22 cent foreign wine with local wine and All Others label it as local, e.g., California wine. Developments in other countries 42 Source: Penn 2007 may affect the competitive position of California’s wine industry. Australia as corn or wheat, wines vary by grape wine shipments have increased almost and Chile produce disproportionate variety, location, and other factors. 60 percent since 1990, meaning that shares of the world’s wine relative to The U.S. food system is marked the largest wineries are shipping more their populations, encouraging exports. by fewer and larger farms producing wine despite a stable market share. China is a great unknown. The acre­ food and fiber, and a similar consoli­ California accounts for about 90 age of winegrapes is increasing, and dation in firms that pack and process percent of U.S. wine production, and more local production may increase farm commodities. The total number the U.S. industry is slightly more con­ interest in wine drinking, opening the of U.S. farms, defined as places that centrated than the California industry. door for imports. However, if local normally sell farm commodities of Figure 4 shows that the top three win­ production leads to wine that can be $1,000 or more, has remained steady, eries accounted for nearly 60 percent sold abroad, China could become a but the largest five percent account of total wine shipments, and the top major exporter. The two possibilities for an increasing share of the value of ten 85 percent of total shipments. are not mutually exclusive, of course, total production—almost two-thirds. An important part of the large firms’ and the net impact is uncertain. The California wine and wine recipe for success is their ability to grape industry is different. The offer distributors and large retailers a Structure of the California number of wine grape growers has range of labels at different price points, Wine Industry: A Special increased slightly to almost 5,000 in including U.S.-produced wine and Case in U.S. Agriculture? the past decade, consistent with the imports. E&J Gallo, the largest winery The California wine grape industry is stable number of U.S. farms, while by sales volume, offers brands ranging different from much of U.S. agricul­ the number of wineries doubled to from jug wines such as Peter Vella, to ture, reflecting the heterogeneity of 2,900, the opposite of the general con­ fighting varietals such as Turning Leaf, wine and the wide range of distribution solidation trend in food processing. to premium offerings under the Gallo channels. There is a wide variation in However, within the winery sector, Family Estate label. Gallo also owns the farm gate prices, in the price of wine, there is significant consolidation. French label Red Bicyclette and distrib­ and in the farmer’s share of the retail The largest California wineries have utes the Australian label Black Swan. wine prices. Equally important is the long accounted for most wine ship­ Many wineries have grown through wide variation in the grower’s share ments. Consolidation is often measured acquisitions, several of which are of the retail price of wine—integrated by the share of total sales accounted motivated by the quest for more labels grower-winery operations that sell for by the largest firms in the industry. or brands. Many wineries also intro­ much of their wine to tasting custom­ The two largest California wineries duce new labels—the number of wine ers receive far more of the average retail have accounted for about 45 percent labels is increasing much faster than price than those growers who sell to of wine shipments over the past 15 total wine sales. Over 500 new wine wineries who sell to distributors and years, the four largest 60 to 65 percent, labels were introduced in U.S. super­ then to retailers. Unlike products such and the eight largest 75 percent. Total markets in 2005, up from 300 the year

Giannini Foundation of Agricultural Economics • University of California 5 Rachael Goodhue is an associate professor, Richard Green is a professor, Dale Heien is an emeritus professor, and Philip Martin is a professor, all in the Department of Agricultural and Resource Economics at UC Davis. They can be contacted by e-mail at [email protected]. edu, [email protected], dmheien@ ucdavis.edu, and [email protected], respectively.

For Additional Information, the Authors Recommend: CDFA. 2007. Final Grape Crush Report. 2006. www.nass. usda.gov/Statistics_by_State/ Grapes, including winegrapes, tablegrapes and raisins, were California’s second-largest California/Publications/ agricultural crop in terms of revenue in 2006, generating 10 percent of the state’s Grape_Crush/indexgcb.asp. $31.4 billion in farm sales. Goodhue, Rachael, Dale Heien, marketing clout may have to seek a before, bringing the number of active Hyunok Lee. 2000. Contract Usage new business model. Mid-size winer­ wine brands in supermarkets to 3,000. in the California Wine Grape ies could shrink and follow the small- As a result, the average number of Economy. ARE Update 3(3):7-9. cases sold per label has been declin­ producer strategy, grow and follow ing toward an average 20,000 a year. a large-producer strategy, or become Goodhue, Rachael, Richard Green, (www.winebusiness.com/SalesMarket­ part of a large producer’s brand port­ Dale Heien, and Philip Martin. ing/webarticle.cfm?dataId=42402.) folio via mergers and acquisitions. 2008. California Wine Industry Smaller California wineries, and Evolving to Compete in 21st Century. similar wineries throughout the United The Future of California Wine California Agriculture 62(1):12-18. States, often aim to sell three-quarters In many ways, wine is a California Sumner, Daniel A, Helene Bombrun, or more of their wine directly to con­ success story. The state’s wine has Julian M. Alston, and Dale Heien. sumers, many of whom visit the winery gained consumer recognition for its 2001. An Economic Survey to taste the wine. Small wineries are quality and introduced new production of the Wine and Wine Grape often defined as those that sell less and marketing techniques that have Industry in the United States than 10,000 cases a year, and direct contributed to its success and have and Canada. http://aic.ucdavis. sales eliminate distributor and retailer spread to other New World produc­ edu/research1/Winegrape.pdf. markups as well as winery-incurred ers. Larger wineries are developing a Wine Institute. Industry shipping costs. Many wineries have portfolio of brands through growth Background & Statistics. www. loyalty clubs that ship wine directly and acquisitions, while smaller win­ wineinstitute.org/communications/ to consumers and invite club mem­ eries are fine-tuning strategies that statistics/#econ_industry. bers to special winery events and offer involve direct sales to consumers. them discounts on additional wine Mid-size wineries may be squeezed purchases. One parallel is commu­ in this emerging wine marketplace. nity-supported agriculture, whereby The California wine industry cannot consumers receive a share of a farm’s be complacent. It faces challenges that production on a regular basis for a fee. include more competition from other Mid-size wineries face challenges. imports and other American wine pro­ Just as grower-packers who are too ducers, but the growing reputation large to depend on direct-to-consumer for quality, the increasing willingness sales, but too small to attract the atten­ of consumers to pay for higher qual­ tion of major distributors or retail­ ity, and the wine industry’s ability to ers, wineries in the middle between innovate bode well for its success. direct sales and multiple labels and

6 Giannini Foundation of Agricultural Economics • University of California