RESEARCH ARTICLE

▲ ▲ California’s industry enters new era

Phil Schermeister

Since the 1970s, when lower-quality jug wine dominated the market, U.S. consumers have developed a taste for better, more expensive . Concurrently, California vintners began producing world-class wines and growers planted tens of thousands of acres of new vines. Above, Many connoisseurs learn about wine and buy directly at the winery.

September 2002, California wines were dramatically improving, IN grape growers picketed a Gallo U.S. consumers in the 1980s and 1990s grape-receiving facility in Fresno, pro- took a new interest in wine and the testing the $65 a ton — just enough to lifestyle associated with fine wine and Dale Heien cover picking costs — offered for their food (see page 76). At the same time, Philip Martin grapes. Meanwhile, swank restaurants consumers increasingly appreciated ▼ were serving wines made from Napa and understood that the taste of wine Cabernet Sauvignon grapes worth reflects where the grapes are grown The wine industry in California and $3,700 a ton. The wine industry in Cali- and how the wine is made. These and the world is entering a new era, fornia and the world is entering a new other changes have contributed to a marked by consolidation and era, as people drink less but better reconfiguration of the California, and globalization. People are drinking wine. Will producers of lower-priced world, wine economy. In the 21st cen- less but better wine. Will producers grapes raise their quality enough to at- tury, the California wine industry is of lower-priced grapes raise quality to tract more upscale wine drinkers, put- changing as a result of consumption pat- attract more upscale wine drinkers, ting downward pressure on all grape terns, consolidation of production and putting downward pressure on all and wine prices, or will the wine-grape the globalization of sales and tastes. industry continue to fragment into dis- grape and wine prices, or will the Quality, not quantity tinct quality and price segments, allow- wine-grape industry fragment into ing one segment to prosper while an- U.S. wine drinkers upgraded their distinct quality and price segments? In other languishes? tastes over the past quarter century as 2001 and 2002, an increased grape In 1976, a revolution took place in baby boomers with more leisure time supply and the recession led to the California wine industry. A blind and money began to explore wine. declining prices for wine grapes in all tasting in Paris pitted several California Consumption of cheaper table wines, areas of California except the North wines against top French vintages. To costing $3 a bottle or less, was stable Coast. Predictions of a severe wine- the eternal chagrin of the (French) during the 1980s. In November 1991, grape glut obscure the possibility judges, the California wines — Stag’s the CBS TV program 60 Minutes aired a that a fragmented wine industry is Leap Cabernet Sauvignon and Chateau segment on the “French paradox,” developing in which some segments Montelena Chardonnay — were voted which found that moderate consump- prosper while others languish. superior. In part because domestic tion of lowers the risk of coro-

http://danr.ucop.edu/calag • JULY-SEPTEMBER 2003 71 TABLE 1. U.S. table wine consumption by retail price (750 ml bottle) and percentage of total volume, 1991–2001

1991 1995 1998 1999 2000 2001 Cases sold (retail price) ...... million cases ...... Ultrapremium (over $14) 2.4 3 5.5 10.1 14.4 14.8 Super-premium ($7 to $14) 7.1 10.1 21.4 24.5 24.5 26.4 nary heart disease, making wine con- Popular premium ($3 to $7) 28.1 34.5 48.1 49.5 52.6 51.3 sumption more acceptable among Jug wine (below $3) 69.2 69.4 67.8 65.7 55 52.6 health-conscious consumers. Wine con- Total 106.8 117 142.8 149.8 146.5 145.1 sumption, especially of better-quality Average price $3.44 $3.88 $4.60 $5.21 $5.88 $5.96 Total volume ...... % ...... table wine, rose sharply (table 1): wines Ultrapremium (over $14) 23471010 carrying labels such as “Chablis” or Super-premium ($7 to $14) 7 9 15 16 17 18 “Burgundy” and classified as jug wine Popular premium ($3 to $7) 26 30 34 33 36 36 Jug wine (below $3) 65 59 47 44 37 36 fell from 65% of consumption in 1991 to Source: Fredrikson 2003. 36% in 2001. Wines costing $7 a bottle or more were 9% of sales in 1991, and 28% in 2001 (Fredrikson 2003). The av- erage, inflation-adjusted price of a had three wires, for the irrigation hose, tracts with guaranteed prices (Goodhue bottle (750 milliliter [ml]) went from cordon or vine, and a catch wire to sup- et al. 2002). Plantings increased 48% be- $3.50 in 1991 to $4.60 in 2001, 2.5% an- port foliage. During the 1990s, trellises tween 1991 and 2001, with the fastest nually. This increase in consumption of became more complex, often having growth in the North Coast and Central higher-priced wines and decrease in wires to guide the shoots upward, fos- Coast areas (table 3; CASS 2002). consumption of jug wines led to the tering growth and facilitating exposure Nonbearing acreage increased even phrase that consumers were drinking to sunlight. Some growers remove faster, although the exact amount re- “less but better.” The popular premium leaves by hand to increase the exposure mains uncertain because some growers category, also known as “fighting of the grapes to sunlight. Grape clusters have not fully reported their acreage. ,” now has a share equal to the that are slow to ripen are removed, in- In 2001 and 2002, the increased once-dominant jug wines. tensifying the flavor of the wine pro- grape supply and the recession led to Higher grape and wine prices led to duced from the remaining clusters and declining prices for wine grapes in all more plantings in California, especially increasing the quality of the wine. areas except the North Coast. In the in coastal areas associated with higher- Grape growers have become more southern San Joaquin Valley, the result priced wine grapes. At the beginning of sensitive to terroir, or local conditions. was extremely low prices, which the wine boom in the late 1970s, pro- Rootstocks have been developed for prompted the protests at Gallo. Over ducer prices for wine grapes rose in all particular areas so that vines are more 60% of grape acreage in the southern areas. However, increased production disease resistant or drought tolerant, San Joaquin Valley (Madera, Fresno in the 1980s led to lower prices and a suggesting that parts of California may and Tulare counties) is Thompson 10% reduction in acreage between 1982 develop a French-style system that as- Seedless, grapes that can be marketed and 1991. As the dollar rose in value in sociates specific grape varieties with as table grapes, dried into raisins, or the 1980s, wine imports surged, achiev- particular areas, such as Cabernet in the crushed to make wine or grape juice ing a 27% market share in 1984. During Napa Valley, Chardonnay in the concentrate — a natural sweetener the late 1980s, the California wine in- Carneros area of Napa and Sonoma added to soft drinks and confectionery dustry again began to expand, but this counties and Zinfandel in the Sierra products. Many southern San Joaquin time growers planted grapes foothill counties. Valley growers do not have contracts such as Chardonnay, Zinfandel, During the 1990s, the demand for with wineries, which explains why they Cabernet Sauvignon and Merlot. The wine increased and some wineries of- were protesting low spot-market or top five wine-grape varieties accounted fered growers multiyear planting con- harvest-time prices in 2002. for 45% of the acreage in 1972 and 65% in 1997, but only French Colombard and Zinfandel were among the top five TABLE 2. California wine-grape varieties and percentage of acreage, 1972 and 2001 in both years (table 2; CASS 2001). Wine-grape production methods 1972 2001 also changed. In the early 1970s, most Carignane 12 Chardonnay 21 growers planted vines in rows 10 to French Colombard 10 Cabernet Sauvignon 15 12 feet apart, which reduced disease Zinfandel 9 Merlot 11 Grenache 7 Zinfandel 10 risks by increasing air circulation but Barbera 6 French Colombard 8 also limited yields on what was becom- Total 44 65 ing more expensive land; rows today Source: CASS 2001. are spaced 8 feet or less apart. The most common trellis system during the 1970s

72 CALIFORNIA AGRICULTURE, VOLUME 57, NUMBER 3 Photos: The Wine Institute

Wine-grape production methods have changed since the 1970s. Many growers have become attuned to local growing conditions and are focusing more attention on trellising, pruning and thinning grapes in the field. As a result, high-value Chardonnay and Cabernet Sauvignon dominate the market.

wineries are buying smaller ones, in , Cook’s, Taylor and Wild Farm, food industry consolidation part to improve their bargaining posi- Irish Rose. The Wine Group owns Glen The farm and food industries are tion with retailers such as Costco. For Ellen, Franzia and Mogen David consolidating so that fewer and larger example, Constellation Brands owns (Franson 2002). Consolidation enables firms account for an increased share of Canandaigua Wine Co. — the second- one producer to market many labels, total sales. The same squeeze on midsize largest wine producer after E. & J. gaining shelf space in retail stores and players is occurring in the wine industry. Gallo — as well as Franciscan Estates, facilitating exports and joint ventures. The nation’s top three wineries — Gallo, giving it a total of 51 brands in 14 Midsize wineries are at a competi- Canandaigua and The Wine Group — market categories, including tive disadvantage vis-á-vis both larger account for over 60% of the volume of Almaden, Cribari, Inglenook, Paul and smaller ones. Small wineries in ar- U.S. wine that is shipped. In the current Masson, Taylor California Cellars, eas frequented by tourists can sell wine phase of industry consolidation, larger Nathanson Creek, Dunnewood, Talus, directly to consumers through their tast- ing rooms, thereby eliminating distribu- tors and retailer markups. For example, TABLE 3. California wine-grape acreage, production and price* the Napa Valley has 300 wineries, a third of California’s total, and most sell much North Coast: Napa, Sonoma, Lake, Mendocino counties 1982 1991 2001 of their wine directly to visitors. Mid- Acreage 71,349 84,086 122,444 size wineries, by contrast, must often Crush (tons) 251,600 347,400 383,000 sell their wine via distributors, who can Share of total crush (%) 12 17 13 Price/ton ($) 621 1,046 2,219 have considerable market power under Total receipts ($1,000) 156,244 363,380 849,877 state laws regulating alcohol sales; in some states, distributors have mo- Central Coast: Monterey to Santa Barbara counties nopoly rights to distribute wine, and Acreage 54,152 49,854 86,501 many states prohibit wine arriving Crush (tons) 165,200 195,200 407,400 from Internet sales. In the traditional, Share of total crush (%) 8 10 14 Price/ton ($) 460 749 1,240 three-tiered marketing system for wine, Total receipts ($1,000) 75,992 146,205 505,176 wineries sell to distributors who sell to supermarkets and liquor stores. The Central San Joaquin: Lodi-Woodbridge area markup from winery to consumer is of- Acreage 80,791 73,111 114,765 ten 100% or more, with much of the Crush (tons) 493,400 519,600 797,700 Share of total crush (%) 24 25 28 profit going to distributors. There is an Price/ton ($) 150 240 390 ongoing effort to eliminate the distribu- Total receipts ($1,000) 74,010 124,704 311,103 tor in wine marketing via Internet sales, but progress has been slow due to the Southern San Joaquin constitutional right of states to regulate Acreage 140,474 108,076 142,463 alcohol sales. Several lawsuits opposing Crush (tons) 1,109,000 989,300 1,290,000 Share of total crush (%) 55 48 45 the ban on Internet sales of wine are Price/ton ($) 143 157 185 presently in court. Total receipts ($1,000) 158,587 155,320 238,650 Large wineries aim to achieve econo- Source: CASS 2002. mies of scale and produce uniform * These four areas account for 98% to 99% of California wine grapes. wines with vertical integration, grow- ing grapes in their own vineyards or

http://danr.ucop.edu/calag • JULY-SEPTEMBER 2003 73 TABLE 4. Global wine production and per capita consumption, 1961–1999

Share of world production 1961 1969 1979 1989 1999 ...... % ...... France 24 18 22 22 22 Italy 26 27 22 21 21 Spain 10 9 13 11 12 United States 34456 Rest of world 37 42 39 41 39 World total (million hectoliters) 202 270 378 283 280

Per capita consumption 1961 1969 1979 1989 1999 ...... liters ...... France 126 112 93 74 60 Italy 108 114 90 62 54 Spain 53 63 65 41 38 United States 44788 Source: Anderson and Norman 2003.

having grapes grown for them accord- and fruity) and were largely settled by lons; about 70% of U.S. wine exports go ing to winery-set specifications. Many European immigrants. The “Dynamic to Great Britain, Canada, Netherlands of the largest vineyards are in the Cen- Trio” are Australia, Chile and South Af- and Japan (table 5; Fredrikson 2003). tral Coast region, which lends itself to rica; they collectively produce 10% of There is a battle fermenting between large-scale production of varietal wine the world’s wine, but have just 1% of Old World European producers and grapes in areas where large parcels of the world’s population, which means New World producers. In Europe there grain and grazing land were converted that most of the wine they produce is are thousands of grape growers, many to vineyards. There are also economies exported. Australia, for example, ex- with fewer than 5 acres, and most send of scale in , with more fer- ports 90% of the wine it produces, and their grapes to co-op wineries. The fa- mentation and storage capacity Australia, Chile and South Africa have mous chateaux that grow grapes and smoothing production and reducing large acreages of vineyard that are not bottle wines with their own labels are wine crush and fermentation costs. yet producing grapes, promising more exceptions. Most European wines are a Technological changes in fermentation wine exports. blend of several grape varieties, and the and quality control have also made it wine is labeled to reflect the region in Import trends easier to produce wine with a consis- which the grapes were grown, such as tent taste, and research continues on The import share of U.S. wines over Bordeaux or Burgundy. The quality and understanding the chemical composi- the last 2 decades has a V-shape: Im- quantity of wine vary from year to year, tion of wine to improve consistency. ports made up 25% of the volume of which means that vintage charts are U.S. wine consumed in the early 1980s, needed to determine the best wines. Globalization of production reached a low of 12% in 1990 and are In the New World, grape growing Although wine is one of the world’s now about 22%. Imports in the mid- and winemaking are often integrated oldest drinks, production and con- 1980s mostly affected U.S. producers of operations in which the winemaker aims sumption remain concentrated in Eu- jug wines, as Italian imports such as for consistency so that the first and last rope, which produces 74% of the Riunite and Bolla increased their U.S. bottle taste the same. New World wines, world’s 6 billion gallons of wine, sales (table 5; Fredrikson 2003). Today’s often produced with more technology, equivalent to 1 gallon for each of the import surge is led by two Australian tend to be preferred by consumers in world’s 6 billion inhabitants. The “Big labels, Lindemans and Rosemount Es- countries that do not produce much Three” wine producers are France tate, which compete with wines pro- wine, such as the United Kingdom. (22%), Italy (21%) and Spain (12%) duced in California’s Central Coast and California transformation (table 4). The other major European Lodi-Woodbridge region. In 2001, the wine producers account for 19% of United States imported 127 million gal- Parts of the California wine industry global wine production. lons of wine and exported 80 million gal- have transformed themselves from pro- The United States is the fourth- largest producer of wine, accounting TABLE 5. Top wine importers to United States, 2001 for about 6% of world production. Other major New World wine produc- Country of origin Gallons (1,000) Major brands ers are Argentina (5%), South Africa Italy 54,152 Riunite, Bolla, Casarsa, Ecco Domani (3%), Australia (2%) and Chile (2%) France 28,746 Georges Duboeuf (Anderson and Norman 2003). They are Australia 29,382 Lindemans, Rosemount Estate Chile 13,429 Concha y Toro, Walnut Crest New World countries in the sense that Source: Fredrikson 2003. they share a common wine style (fresh

74 CALIFORNIA AGRICULTURE, VOLUME 57, NUMBER 3 California Grown

The Wine Institute

The California wine industry has been transformed into a segmented market. Premium wines are in greater demand, while growers of “fighting varietals,” left, must respond to fast-changing consumer tastes and a current surge of imports. Producers of Thompson Seedless, right, can sell their grapes for lower-priced uses, although profitability is presently limited.

ducers of jug or generic wine to pro- kets. However, profitability in these al- pand. If the demand for jug or generic ducers of high-quality wine; or from ternatives, especially raisins and wine, wines continues to fall, the 21st-century producers of wines labeled Chablis or is presently limited. wine industry may operate at very dif- Burgundy, which are winegrowing ar- A related question is how long the ferent speeds, with one segment enjoy- eas of France, to producers of world- trend toward more expensive wines ing record profits while another class Chardonnay and Cabernet will last. Today’s population of senior uproots unprofitable grapes. Sauvignon. UC research and individu- citizens is the wealthiest in history. als in the Napa Valley laid the ground- Many marketers feel this is the source work for the 1976 Paris surprise. The of the shift to more expensive wines, wine boom they launched made some and they note that the size of the baby sectors of the state’s wine industry ex- boom generation is unique in U.S. his- tremely successful. tory. At some point the shift to wine D. Heien and P. Martin are Professors of The most pressing question facing and to higher-priced wines may cease. Agricultural and Resource Economics, UC the industry is how fast producers can Current levels of consumption, even for Davis. The authors thank Kirby Moulton respond to changing consumer tastes, higher-priced wines, have been stag- and the reviewers for useful and insightful as wine drinkers shift from jug wine nant since 2000. This may be due to comments. to fighting varietals, fighting varietals current economic forces and perhaps to premium, and premium to ultra- September 11, or it may foretell a pla- premium wines. Analysts who do not teau in wine consumption such as that distinguish between these different cat- experienced in the 1980s. References egories predict a “wine glut of historic In addition to the change in tastes, Anderson K, Norman D. 2003. Global proportions” (Palmer 1998). An article considerable concern exists regarding Wine Production, Consumption and Trade, in Barron’s emphasized that, with wine the level and direction of imported 1961–1999: A Statistical Compendium. production rising 4% to 5% a year, and wines — both bottled and bulk — Adelaide, Australia: Centre for International Economic Studies, Adelaide Univ. 369 p. consumption rising 0% to 1% per year, which are used for blending. California [CASS] California Agricultural Statistics “The basic laws of supply and demand vintners in partnership with foreign Service. 2001. California grape acreage: guarantee that the coming glut will wineries, or California wineries with 1972 and 2001. Sacramento. have a depressing effect on retail wine vineyards abroad, may prosper, but the www.nass.usda.gov/ca. CASS. 2002. Final grape crush report prices” (Palmer 2001). However, this fate of growers is less clear. Other con- 2001, 1991 and 1982. Sacramento. prediction of a glut ignored the possi- cerns arise over the impact of ongoing www.nass.usda.gov/ca. bility of a segmented wine industry, as consolidation, especially on medium- Franson P. 2002. Canandaigua digests its big bites. Wine Business Monthly. October. well as alternative outlets for lower- sized wineries, which could result in a p 23–7. quality grapes. In a segmented wine in- few large wineries and many small Fredrikson JA. 2003. 2002 Annual Wine dustry, some parts may be booming wineries marketing to the agro-tourist Industry Review. Woodside, CA: Gomberg, while others go bankrupt. Displaced and Internet trade. Fredrikson & Assoc. Gomberg-Fredrikson Re- port 22(12):5, 21. growers have alternatives in the grape The wine industry has been among Goodhue et al. 2002. Contact use wide- concentrate (sweetener), raisin and the most successful of California’s spread in wine-grape industry. Cal Ag table-grape markets. Thompson Seed- farming sectors. The growing number 56(3):97–102. Palmer J. 1998. The coming glut. Aug 3. less grapes, which account for one- of educated wine drinkers, optimists Barrons. p 1. third of the California grape acreage, emphasize, means that the demand for Palmer J. 2001. Bacchus’ revenge. Aug can be sold in any one of the four mar- premium wines can continue to ex- 27. Barrons. p 1.

http://danr.ucop.edu/calag • JULY-SEPTEMBER 2003 75