Tag Archives: wine business

SVB wine industry report 2017

SVB wine industry reportDoes the SVB wine industry report show the next stage in the evolution of the U.S. wine business?

Are we watching the next phase in the evolution of the U.S. wine business? Perhaps, if Rob McMillan is spot on with his analysis in the annual SVB wine industry report.

As he usually is.

“Why is growth slowing?” McMillan asked during the report’s webcast on Wednesday. “It’s changing consumer demographics and patterns.”

In this, the Baby Boomers – who have fueled the unprecedented growth in the U.S. wine business over the past four decades – are officially on the wane. Though they still control some 40 percent of the U.S. market, their clout is being passed to the two younger generations. Both Gen X and Millennials are showing market share increases, and their 50 percent total has passed the Boomers (though, in wonderful irony, the vaunted Millenials drink about half as much wine as the Gen Xers). That’s the chart at the top of the post; click on it to make it bigger.

And they don’t drink the same things that their parents and grandparents do, focusing on red blends and, surprisingly, sauvignon blanc, as opposed to the traditional varietals. The red blends, which I’ve written about extensively, were the subject of much discussion and consternation during the webcast; no one was quite sure whether these younger wine drinkers would stay with red blends or switch to the traditional varietals.

The report also outlined:

• The continued bifurcation of the U.S. wine market, with the annual decline in sales for wines costing less than $9 and growth in wine costing more than $12. The study expects significant growth in U.S. wine costing more than $15.

• Increasing costs for U.S. producers – land, certainly, but also labor. How this will affect the business remains unclear, although it is one of the factors driving the bifurcation. Producers with more expensive wines can better afford to deal with higher costs.

• Increased competition for wine from craft beer and legal marijuana, and especially among younger drinkers.

• The increasing popularity of low-priced imports, and not just because of the stronger dollar. For example, there is little $10 California rose, mostly because of higher costs, but lots and lots of $10 French and Spanish rose.

Hanging over the entire discussion during the webcast was where Big Wine fits into California’s future. The report expects winery mergers to continue (and the chart in on page 39 detailing winery mergers was as depressing as it was lengthy), but didn’t go much further than that. The webcast’s participants, including several comments from the audience, seemed to imply that Big Wine would define trends in style and that it was up to smaller producers to fill in the areas that were too small or too expensive for Big Wine to worry about. Which is also depressing — letting multi-national companies decided what wine would be made.

Kunde Family Winery: Selling less wine to be more successful

Kunde Family Winery

Jeff Kunde

Want to know how much the wine business has changed and how much angst that change has caused? Look no further than Sonoma’s Kunde Family Winery, a quality producer that has long made some top $10 wines, but has decided to cut production by one-third to be more competitive.

Call it addition by subtraction, thanks to distributor and retail consolidation.

The goal, says Jeff Kunde, the fourth of the five generations of his family to run the winery, is to go from more than 100,000 cases to 70,000. That’s because 100,000 cases isn’t big enough to be big any more, but it’s still too big to be small enough to be the artisan- or craft-style producer that distributors prefer if you don’t make one-half million cases.

At 70,000 cases, Kunde says, the winery doesn’t have to worry about being in every grocery and chain in the country and fighting money-losing price wars to keep shelf space. Plus, the change will allow Kunde to focus on the more profitable parts of wine, like its tasting room sales, and direct shipping.

“Consumers are not as loyal as they used to be,” says Kunde, who was in Dallas last month to visit his distributor and make the rounds of retailers and consumers. “They don’t see the wine they buy, as much much as the see the $9.99 price. And it hurts us when that happens.”

Cutting production should also allow the winery to make better wine for more or less the same price, since it won’t need as many quality grapes. In addition, says Kunde, it wants to let consumers know about its 100-year history, that it’s a smaller, family-run business and that it’s part of “the idea that people know where their wine comes from,” says Kunde. All of this will help it do better financially by making less wine.

The wines we tasted were up to the Kunde standard. The 2014 chardonnay ($12, sample, 13.8%) was lightly oaked but with enough vanilla to be California, balanced by fresh, tart pear. The 2014 sauvignon blanc ($12, sample, 13.8%) was grassy and lemony, with a softer finish than I expected. These wines remain excellent values, and are well worth buying.

The higher-end 2014 Reserve Century Vines Zinfandel ($40, sample, 14.8%) is loaded with sweet black fruit, but it’s not cloying or overly jammy, as so many post-modern zinfandels are. In this, it’s a nice balance between the current style and wine that you get actually drink and enjoy.

Fred Franzia and the future of the wine business

Fred FranziaFred Franzia, the man the California wine business loves to hate, reminded us why last week when he spoke to the wine industry’s most important trade show. “One billion bottles of Two-buck Chuck,” he said to the audience, and I can imagine almost all of those in attendance cringing. Because the last thing the 21st century California wine business wants to be known for is very ordinary $3 wine sold at Trader Joe’s.

Still, Franzia is one reason why California is the most successful wine region in the world. His successes, whether becoming one of the first to sell competently made cheap wine like Two-buck Chuck or pioneering the Big Wine model that is the blueprint for the industry’s domination today, are indisputable. But his speech also revealed why so many in California wine who aren’t Gallo and Constellation aren’t prepared for the rest of the 21st century.

That’s because it was written through the lens of his family’s three generations of success, which was built on better winemaking technology, an unparalleled knowledge of the supply chain, and a canny insight into the Baby Boomers who transformed the way Americans drink wine. Franzia’s Bronco Wine is an example of 20th century manufacturing at its finest — give the consumer a quality product at a fair price, and make sure the retailers who sell your product make lots of money, too.

Those days are long gone. Does Apple really care about its retailers? Does Whole Foods really care about the manufacturers who supply its stores? And does Amazon really care about anyone other than Amazon? Know, too, that Amazon became the largest retailer in the U.S. and it got there without selling a drop of wine.

Yet Franzia spoke about the wine business as if none of that mattered. His talk was firmly rooted in what has been, and not what will be. He was particularly critical of the recent Silicon Valley Bank report that spoke of serious challenges facing the wine business as the Boomers age and consumption declines, dismissing the report as irrelevant because it didn’t accept the truths that he has seen over the past 50 years.

He also quoted Mel Dick of Southern Wine & Spirits, the largest distributor in the world, who has said famously that if U.S. per capita consumption was as big as the French, we’d drink 1.6 billion cases of wine a year — five times what we drink now. The catch? Besides the French wine culture, they don’t have distributors, and buying wine there is as easy as buying a baguette. Which, of course, is not the case in the U.S. That Franzia doesn’t realize that the three-tier system damps down wine consumption and is increasingly irrelevant in the 21st century is not surprising, because he still sees distributors as crucial to wine’s success as perhaps they once were.

One of my regrets in some 20 years of wine writing is that I’ve never interviewed Franzia; the couple of times an interview seemed possible, something fell through. That’s because I admire and respect what he has done, and if nothing else for his constant harping about too-high restaurant wine process. And his success with Two-buck Chuck revolutionized the wine business, something for which many of his colleagues will never forgive him.

But past success is no guarantee of what will happen in the future, and it’s not change that matters as much as how one adapts to change. And change is coming to wine, whether anyone wants to believe it or not — even if you’re Fred Franzia.

Fred Franzia cartoon courtesy of The New Yorker, using a Creative Commons license

The end of the wine business as we know it?

wine businessThe one consistency about the wine business, as we celebrate the blog’s eighth birthday, is that the big get bigger, and that there isn’t any room for the small. Or, as a distributor friend of mine put it the other day, “It’s all about consolidating or dying in this world of global megacorps.”

Gone are dozens of companies that made wine that I enjoyed — producers that were bought or folded or absorbed by other companies, many of which are also gone. Remember Hogue, which made a quality $10 sauvignon blanc in the 1990s? It was purchased by the Canadian Vincor, which was soon gobbled up by Constellation. That entire process, three complicated financial transactions worth tens of millions of dollars, took place in just five years.

The difference these days is that the big are bigger than ever, and today’s small companies used to be considered big. The 10 biggest wineries in the U.S. account for about 71 percent of all the wine sold, based on figures from 2014 from Wine Business Monthly, and this amalgamation is happening on the distributor side, too, with the 10 biggest wholesalers controlling two-thirds of the market.

Throw in consolidation among retailers, and Big Wine will soon be selling to Big Retail through Big Distributor, and a handful of companies will control what we drink — the prices, the quality, even what it’s supposed to taste like. It will be the end of the wine business as we know it.

In this, there will be two markets for wine, what economists call bifurcation (and which is happening elsewhere in the U.S. economy). In the first, called the mass market, Big Wine will make as many as four out of every five bottles sold in the U.S — competent though often overpriced grocery store plonk with little varietal character and designed to appeal to specific demographics, the way laundry detergent and yogurt are. In other words, “smooth” wine.

In the second, called the luxury market, what’s left of the traditional wine business, both producer and distributor, will sell wine costing more than $20 to people who can afford to buy it, and whose spending will keep the dwindling number of traditional retailers and small distributors in business.

The idea that wine quality has anything to do with price will be as quaint as getting a letter in the mail. Instead, we’ll buy wine because the name speaks to our lifestyle or the label pops or any of the hundreds of other marketing techniques that Big Wine uses. And why not, since merlot will taste like zinfandel which will taste like pinot noir. For $15 at the grocery store, we’ll get fruity red wine with soft tannins and chocolately oak, and the Winestream Media will give these wines 88 points and gush at the value. The wine on the luxury side may remain varietally driven; what’s the point of paying $300 for white Burgundy that tastes like vanilla extract? But since it will be too expensive for all but a few of us, we’ll never know.

Sound too depressing to be true? Just another Wine Curmudgeon rant? Maybe, but there’s evidence it’s already happening in Great Britain: “A two-class wine market is emerging in the UK as some wine drinkers splash out and others are increasingly drawn to hard discounters,” and where the amount of wine sold is decreasing, but its value is increasing. Which, not coincidentally, almost happened in the U.S. this year.

I’ve spent a lot of time over the past year trying to decide whether to keep writing the blog, given the way things are going. I’ve always been an anachronism, a wine writer who writes about wine for people who don’t know much about it, but these changes threaten to make me as useless as a typewriter. What’s the point of writing about quality cheap wine when there may not be any?

But I’m also stubborn. If all this happens, someone has to remind the wine business that they’re turning what we love into an alcoholic version of soft drinks, and that some of us want more than Mr. Pibb and Dr Pepper. So I’ll hold on for as long as I can, keyboard in hand, rants at the ready, my Gascon whites and my Sicilian reds and my crisp roses nearby, and I’ll keep repeating: “Do not go gentle into that good night. … Rage, rage against the dying of the light.”

The Comet Lovejoy wine phenomenon

comet lovejoy wine

But how do they get a bottling line up there?

Astronomers were surprised to find that some comets produce alcohol, as well as sugar, as they travel around the solar system. “We found that comet Lovejoy was releasing as much alcohol as in at least 500 bottles of wine every second during its peak activity,” said Nicolas Biver of the Paris Observatory in France.

This is huge news, given that one theory supposes that comets crashing into the the Earth 3.8 billion years brought with them the carbon-based organic molecules, like alcohol and sugar, that may have jump-started life on our planet. Which is all well and good, but comet Lovejoy wine raises equally important questions for those of us who worry about those things:

? Do the comets know about the three-tier system? Lovejoy was producing the equivalent of 150,000 cases an hour, and we all know that the country’s distributors aren’t going to let that happen without them. They’ve paid entirely too much money to state legislators to let a comet ruin things. And I can only imagine the horror if Lovejoy passed anywhere near Pennsylvania, with its state store system.

? Will E&J Gallo, the Big Wine producer that has made hundreds of millions of dollars of acquisitions this year, buy the comet to add to its portfolio? A sweet Lovejoy red, since the comet threw off sugar, would slide in nicely next to Gallo brands like Apothic and Barefoot on grocery store shelves. And how could a back label that said “Comet Lovejoy wine — out of this world” miss?

? Can the Winestream Media adapt its tasting notes to comet-produced wine? Toasty and oaky, given how cold it is in space, just aren’t going to work. Maybe something like “hints of vacuum linger on the finish”? And how do you a score a comet wine? Does it get 92 points just because it’s from a comet? Or do you take points off for that, since outer space is not Napa Valley?

Photo courtesy of Adam Block Photos, using a Creative Commons license

Why Big Wine will keep getting bigger

Big WineThink this year’s wave of Big Wine buyouts was impressive? Just wait. Big Wine is only getting started.

The wine industry is going through unprecedented consolidation, and even I’m surprised — and I’m the one who predicted it. That’s because three things have made this the perfect time for companies like E&J Gallo, Constellation, and The Wine Group to snap up smaller producers the same way a small child attacks Chicken McNuggets. This is a mixed blessing for the consumer, who will get increased access to well-made wine, but at the cost of much of the wine tasting the same regardless of where it’s from and who made it:

? Cheap money. Interest rates are not just at historical lows, but have been there for almost 10 years. That makes the cost of borrowing to buy a winery so low that even those of us who aren’t M&A geniuses understand how much sense it makes. Plus, rumors of an interest rate hike this fall may have spurred this summer’s wave of buying, so that Big Wine could lock in all that cheap money.

? The biggest wine companies are preparing for a world where we buy most of our wine at grocery stores, warehouse stores like Costco, and large chains like Total Wine. This will happen sooner rather than later (if it hasn’t already), and anyone who doesn’t understand how important this is is missing the biggest change in the wine business since the end of Prohibition. Big Wine wants product to fill all those store shelves, and the easiest way to do that is to buy another winery. Could the local wine shop, with someone who waits on you, become as quaint as the corner drug store and gas stations with attendants who clean your windshield?

? The end of the family winery era in California, which started in the 1980s and did much to make California wine some of the best in the world. But wine is not immune to the laws of family business, which say that any family business that lasts past the first generation is the exception. And most of the family wineries that have been sold in the past couple of years are first- and second-generation companies. As one banker told me, there are more wineries that want to sell than anyone can imagine.

The other thing about all these buyouts? That wine, despite what so many think, is no different from any other industry, and the same kind of consolidation that has transformed U.S. business since the beginning of the century — Heinz buying Kraft, for example — will transform wine. This is a change many don’t like and even more don’t understand, but it seems inevitable.

Update: Sweet red wine is taking over the U.S.

sweet red wineThe surprising thing about this month’s sweet red wine post is how muted the reaction was. Hardly anyone seemed surprised. Dismayed maybe, or irritated, but not especially surprised. That’s because the people who follow these things had an idea it was going on, and those who don’t — like most of the Winestream Media — don’t consider it important enough to be surprised.

And the wine drinkers buying all that sweet red? They weren’t surprised, dismayed, or irritated. They’re just happy someone is making wine they enjoy. Or, as a 30-something woman told me about her favorite sweet red, Cupcake’s Red Velvet: “It’s really good, and it’s really about the only red wine I like.”

The one thing most everyone agreed on? That the numbers, though imprecise, offered a real sense of how big sweet red has become — the fifth biggest category in U.S. wine sales, behind chardonnay, cabernet sauvignion, pinot noir, and merlot. Given its momentum, I wouldn’t be surprised to see sweet red pass merlot for fourth in the next couple of years.

So it’s not a coincidence that red blends accounted for 40 percent of all new wines over the past two years, compared to just 18 percent for chardonnay and cabernet combined, according to Beverage Media magazine. Yes, not all red blends are sweet, but sweet reds are at least two-thirds of red blends, based on data in the first post. This is another sign of how important sweet red has become.

How sweet is sweet? About 1.0 or 1.2 percent residual sugar, compared to less than .08 residual sugar for dry red wines. Other highlights in the wake of the first story, combined with additional reporting that I did:

• Consumers don’t necessarily see sweet red as sweet, says Christian Miller of Full Glass Research, who has probably studied this subject more than anyone in the country. ” ‘Sweet’ is not an attribute that large numbers of regular consumers use with regards to these wines,” he said. “They are more apt to regard them as flavorful or smooth or interesting. Many consumers jump back and forth between dryer and sweeter versions of these wines.”

• The wine industry remains uneasy about calling a sweet wine sweet, says Miller. “It’s possible that some of these companies have tested adding the word sweet to the label or description, and found it harmful. On the other hand, based on my experience in the wine industry, the number of decisions based on gut instinct, trade notions, or small unrepresentative samples is surprisingly high, even among large MBA-ish companies.”

• Since sweet red doesn’t depend on appellation or specific grapes, it can be made with fruit from anywhere in California, Or, as wine economist and author Mike Vesteth told me, sweet red can be made with all the merlot and syrah that wouldn’t be sold otherwise, and which costs less to use. Hence higher profit margins than more traditional wines.

Finally, no one — not even anyone at E&J Gallo, whose Apothic started all of this — expected sweet red to do this well. Gallo, I have been told, developed Apothic to appeal to Millennials, to compete with the Menage a Trois red, and to earn supermarket shelf space. That it might change U.S. wine never really occurred to anyone.

For more about sweet red wine:
• The ultimate Internet guide to sweet red wine
• What’s next for sweet red wine?
• Wine terms: Sweet vs. fruity