From booming direct-to-consumer sales to available credit for expansion, wineries and vineyards are reaping the benefits of a thriving wine sector, according to Wines & Vines’ annual survey of wine industry suppliers.

For the first time since Wines & Vines launched the survey in 2008, 100% of respondents said the financial health of their winery and vineyard clients was as good or better than the previous year. The results are markedly different from those reported in 2011, when almost 20% of respondents said their clients were “doing worse” financially than the year before.

But just as the price consumers are willing to pay for wine is trending up, so too are the prices for goods and services offered to wine industry businesses. More than half of those surveyed indicated they plan to raise prices during the coming year.

As suppliers of products and services to wineries and vineyards, vendors are in a unique position to gauge their clients’ businesses. One respondent from the packaging design sector summarized that winery health “appears to be very good, based on our receivables.” With a strong Consumer Confidence Index boosting the luxury goods market, wineries have cash in the bank and are paying their bills on time rather than waiting for the busy season to catch up on past-due invoices.

Another respondent, a bottling equipment vendor, noted that wineries are making the most of the favorable economy by investing in new construction and filling their cellars with top-of-the-line winemaking equipment. Even those who aren’t upgrading their facilities are re-evaluating their assets and making capital improvements, possibly encouraged by the low interest rates available to good candidates for credit.

As technical sales director for BSG Wine Division in Napa, Calif., Ryu Yamamoto works with wineries big and small. “They all seem to be growing,” he said. “Their sales are going up.”

EASY FINANCING
A full 98% of survey respondents said their winery and vineyard clients have the same or better access to financing for products and services as they did a year ago. Such free access to credit is significant, given that just six years ago 15% of suppliers said they planned to tighten credit terms for wine industry clients in the year ahead.

As a special finance report in the September 2016 issue of Wines & Vines advised, “Now is an exceptional time to lock in long-term loans at advantageous rates….Rates remain low, (and) competition for loans among banks remains high.”

Bill Rodda, managing director of agribusiness for American AgCredit, agrees, saying that particularly in premium winegrowing areas, there is a perception that assets are going to increase in value. AgCredit is part of the Farm Credit System, a network that serves as the largest lender to vineyards and wineries, but commercial banks are eager to serve the wine industry as well.

“Ag has been perceived as a good investment by commercial banks, and the supply for lending in the United States is still very strong,” Rodda said.

TRENDS AT WORK
The availability of credit isn’t the only factor behind winery expansion, however. The trend of large wineries gobbling up smaller wine producers promises to change the way these businesses are run, whether it means larger production or increased scrutiny on fruit sourcing.

“Some smaller operations want to grow and take things to the next level,” Rodda said. “But they may not have adequate capital,” which can come in the form of investments such as GI Partners’ deal with Far Niente Wine Estates or TSG Consumer Partners’ larger acquisition of Duckhorn.

And while larger players have been focused on securing vineyard sources and wine-production space a handful of producers have hedged their bets in light of waning sales for mid- and low-priced bottles and bag-in-box wines.

BSG’s Yamamoto points to wineries adding distillation and brewing capabilities as examples, as well as clients adopting technologies that promise to save money during the winemaking process.

The suppliers who responded to our survey also reported that renewed interest in higher priced brands—dubbed “premiumization” by the wine industry—is a major factor driving businesses this year.

In addition to acquiring high-priced wineries and well positioned vineyards, some producers of traditionally entry-level wines are even spinning off high-end brands made with fruit from well-known AVAs rather than the ubiquitous California designation typically used for mass-produced wines from the San Joaquin Valley.

Bruno Remy, vice president of sales and marketing at Canton Cooperage in Windsor, Calif., told Wines & Vines, “The large groups—Gallo, The Wine Group, Constellation, Trinchero—are trying to make wines with more quality, but also higher prices.”

Nowhere is the trend more evident than in Constellation’s recent acquisition history, which includes brands The Prisoner ($32-$47 per bottle) and Meiomi ($16-$25 per bottle).

FROM THE SUPPLIER SIDE
For wine industry suppliers, however, all that consolidation can come at a cost. Some long-time wine industry vendors believe the trend has put pressure on them, as corporate owners increasingly expect to get cut-rate deals due to their size.

One California winery supply retailer even accused large wine companies of purchasing premium brands and then “bastardizing” them to the point they are relegated to mid-range and eventually value pricing.

That said, consolidation is only one of many trends reported by wine and grape industry suppliers.

A NEW TYPE OF BUYER
Several wine industry service providers noted that the high cost of entry is drawing a new type of winery and vineyard owner.

“People are making wines not just for fun, but to sell the wines,” Remy said, noting that several newcomers to the business aren’t brick-and-mortar wine producers but virtual wineries using their neighbors’ facilities for custom crush.

In a competitive market, virtual winery ownership can be a way to ease into the winery business without risking a multi-million-dollar investment. “It’s probably tough for all these new brands to find their place in the market because there is a lot of competition,” Remy said, “but people are doing it successfully.”

Rodda from American AgCredit added, “It’s becoming more difficult for smaller, family-owned enterprises to exercise muscle in a large book,” referring to the hundreds of brands that distributors represent to potential off-premise accounts.

It is the same dilemma that prompted the late Jess Jackson, founder of Jackson Family Wines and producer of some of the most popular wines on U.S. retail shelves, to enter the distribution market himself in 1993. Today Regal Wine Co. represents not just JFW wines but also 55,000-case Opolo Vineyards of Paso Robles, Calif., 18,000-case Lange Estate of Dundee, Ore., and others.

DIRECT-TO-CONSUMER SALES
Wineries looking to eschew the three-tier model are increasingly adopting the direct-to-consumer channel as a way to grow their sales and create loyal customers and brand ambassadors.

“DtC has been a huge factor for the smaller wineries for the past five to 10 years. Selling on-site at the winery itself, the mailing list, all those things are huge because that’s full FOB price,” Rodda said, referring the drop in revenue that accompanies each step of three-tier distribution.

The growing DtC sales channel has produced not just a new source of revenue for wineries but also a variety of businesses to cater to their DtC needs. One supplier of packaging used for DtC shipping predicted his sales for the channel would grow between 20% and 30% in the coming year.

Indeed, DtC shipments grew from $63 million in September 2009 to $198 million in September 2016, according to data from ShipCompliant and Wines Vines Analytics, which show annual DtC sales from U.S. wineries to be well north of $2 billion.

PRICES TO CLIMB SLIGHTLY
As wine sales grow, the prices of products and services available to wineries and vineyards often increase as well. More than half of survey respondents said they planned to increase prices in the next 12 months, and 18% say increases will jump more than 3%. Many attributed the increase to trends in the pricing of raw materials and labor.

Cooperage is one industry that has seen materials costs skyrocket in recent years, al
though thankfully that trend seems to be abating somewhat. According to Remy, the housing crisis of 2008 took a huge toll on the logging industry, as new construction came to a screeching halt along with demand for building materials. The abrupt change forced many saw mills out of business.

“To restart the process and have these people in the supply chain—from the forest to the producers to the factories—took some time and was very difficult,” Remy explained of the post-recession years. “You had to pay much more to get wood. Companies went bankrupt.”

Around the same time, a growing number of consumers took an interest in craft spirits such as Bourbon, which requires the use of new white oak barrels for labeling purposes. Competition for barrel staves became fierce, and at the peak Remy said stave prices shot up 25% per year.

Now, after five years of volatility in the price of American oak, the market has started to soften, Remy said. “It’s increased above the rate of inflation these last years and has been very difficult for us to follow, but it seems better now.”

WHAT’S AHEAD
As 2016 nears its end, wine industry suppliers are looking to the year ahead with optimism. More than 80% of survey respondents expect the wine industry to grow in the coming year—albeit slowly.

With 2016 wine grape yields in California expected to surpass the 3.7 million tons reported in 2015, bulk wine sales should loosen up and help balance fears of a short supply heard earlier this year. As winemakers clean up from harvest and settle must into barrels and tanks, the future looks bright.