Weed's Effect on Wine Sales

Distributor reports alcohol sales fell, then rebounded, after marijuana legalization in Colorado

by Paul Franson and Jim Gordon
Source: Colorado Department of Revenue
Napa, Calif.—The most unusual talk at the 24th Wine Industry Financial Symposium Monday and Tuesday was about the impact of legalized marijuana in Colorado. Cleverly scheduled as the last session to keep the busy attendees in their seats, it documented a fall in wine sales after medical marijuana was legalized there, but later a dramatic gain when recreational marijuana was allowed.

The conference united executives and staff from the wine business with lenders to hear from experts in all aspects of the business. Attendance at the event held in Napa was more than 250.

A recurrent theme was the growing split of the wine business into two worlds: high-volume wines made mostly from grapes grown in California’s Central Valley and priced less than $10 per bottle, and higher priced wines from coastal grapegrowing regions.

Sales of cheap wine have been shrinking as more expensive wines have grown in popularity. In recent years this trend has led the three largest wine companies to invest in the coastal region.

Cannabis’ coming impact
Jim Smith of Republic National Distributing Co.-Colorado, a major distributor, reported that after only a year, taxes from recreational cannabis sales are greater than those from all alcoholic beverages combined.

He showed that legalization of marijuana seemed to have hurt wine and other alcohol sales initially, but the event fairly quickly increased tourism and even migration into the state by young people, which has more than compensated for the drop.

He reported, however, that while most of the tax money was intended for schools and medical research, in practice half of the money has been used for enforcement.

He added that four states and the District of Columbia allow recreational marijuana sales at present, and an additional 12 states are considering it.

Surely people in all tiers of the wine business are pondering marijuana’s possibilities, too. For now, recreational marijuana is a direct-to-consumer business, but Smith said wine and spirits wholesalers are looking closely at cannabis sector, and some believe it will need the middle tier to provide a level playing field, as was intended for immediate post-Prohibition alcohol sales.

Wine business the focus
Of course, most of the conference was about the wine business. The audience heard about recent mergers and acquisition activity and financing trends in workshops the first day.

Adam Beak, managing director of the Bank of the West, noted that these are good times. “If you’re not making money in the wine business today, you should look in the mirror for the reason.” This success comes in spite of relatively static consumption and threats from craft beer and spirits.

Beak does, however, foresee problems for lenders. “We’re falling off the cliff again” with easy credit and low lending rates. He said that large “outside” lenders with little experience in the wine business are entering the industry offering exceptional deals, but he warns, “They won’t be around when things get tough again.”

During the second day of the conference, David Freed, who founded the symposium, noted that total known California acreage planted to wine grapes has changed little since 2002, and the number of bearing acres stands at about 570,000—even though consumption has grown dramatically. That’s largely because of more efficient vine management, Freed said.

Ted Baseler, the CEO of Washington’s Ste. Michelle Wine Estates, took an interesting tack in his talk. He repeated part of his talk at the meeting 10 years ago, when conditions were remarkably similar to those today.

However, in that time, Ste. Michelle has become one of the largest players in the business, and acquired prestigious Stag’s Leap Wine Cellars in Napa Valley as well as Erath in Oregon. And Washington has more than doubled its vineyard acreage to 67,000 and become a serious contender for wine sales.

Steve Fredricks, president and partner of Turrentine Brokerage, gave an update on the harvest, though hard data is still scarce. After three large harvests, this year is coming up lighter than expected, he said.

Of the major grape varieties only Pinot Grigio is in short supply, but conditions differ in different regions. Supply and demand appear balanced in some areas like Lodi, a major source of wines priced less than $10 per bottle, while the Paso Robles crop could be 30% below earlier projections. 

Power to the retailer
A recurring theme in several presentations was the growing power of retailers, particularly large chains, while the ongoing consolidation of the wholesale or distributor tier seemed to take a back seat.

“Anybody today who is not focused on the chains is missing a huge opportunity,” said John Grant, recently named as COO of 750,000-case The Hess Collection Winery, based in Napa. “Some are concerned or scared about chains, but they can be very effective if you spend time with them and work with them.”

Diane Cline of Round Pond Estate in Rutherford, Calif., said that despite Round Pond’s small size of 8,000 cases, she has been able to “stick a toe in the water” at the Total Wine & More chain, which will allow some wines to be sold in just a few stores as a test. “We are easing into it now, so as it grows we can then approach their corporate office in Maryland to take it further.”

Nick Withers, vice president of sales strategy and development for Constellation Brands, noted that in the off-premise channel the top 15 chain accounts do about 30% of Constellation’s wine business, and agreed that chains are important. “Ignore them at your peril,” he cautioned.

Another speaker was Ian Harris, chief executive of the Wine & Spirit Education Trust. A close observer of international wine sales trends, he said that globally a 433 million-case structural wine surplus exists.

The surplus, combined with a highly fragmented producer base around the world means intense competition, he said, which implies decreasing financial returns, which implies a decline in investment, which could create a downward financial whirlpool. Solutions exist, however, including reducing supply by removing vineyard acreage, as the European Union and Australia have done before.

Harris also reflected on the power of retailers, including huge wine merchant Tesco in the U.K., which is notorious for demanding low prices from wineries, driving the market down and making it difficult for both wineries and other retailers to make a profit.

As an educator of wine consumers and the wine trade, however, his organization can help counter the trend, Harris said. He showed data from a Wine Intelligence study that linked better educated sales staff to higher off-premise sales, and better educated consumers to more frequent trading up when they visit wine stores and restaurants.

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