06.07.2016  
 

What the $9 Divide in Wine Sales Means

Turrentine Brokerage analyzes effects on California grape supply

 
by Paul Franson
 
wine bulk cabernet sauvignon grapes
 
Source: Turrentine Brokerage
Novato, Calif.—Turrentine Brokerage has just released its annual Turrentine Outlook with an overview of the wine supply in California. The 247-page report also focuses on the split between grape and wine supply for brands priced less than $9 per bottle versus brands selling for more than $9 per bottle.

Turrentine president Steve Fredricks summarized its findings before providing more detail: “Things are going along pretty well. A number of factors are influencing grape supply, but we aren’t facing any single variable that is dominating market dynamics as in years past. You just have to keep track of more variables.”

The 2015 harvest was light in coastal regions and about average in California’s interior regions, which helped to balance excess inventories brought on by the large 2012, 2013 and moderate 2014 harvests.

This shift has increased demand for bulk wine and most 2016 grapes from all regions at the same time that fewer grapes and less bulk wine are actively for sale compared to previous years at this time.

And while the El Niño weather pattern didn’t live up to expectations, California growers still received enough water to breathe easier throughout the 2016 growing season.

    THE GREAT DIVIDE
     

     
    Below $9 per bottle retail
    (Sourced mostly from California’s interior regions)

    Factors softening the market below $9 per bottle retail:
    • Consumer sales below $8 per bottle are flat or declining, especially for Merlot, white Zinfandel, and red Zinfandel.
    • Some excess inventory remains of less in-demand varietals due to large harvests in 2012 and 2013, and an above-average harvest in 2014 and 2015 in California’s interior.
    • Newly bearing acres in the interior.
    • Strong dollar attracts imports, impedes California exports.

    Factors strengthening the market under-$9 per bottle retail:
    • Consumer sales still growing for Pinot Grigio, Moscato, Pinot Noir, premium red blends, Cabernet Sauvignon and Chardonnay.
    • Sales of wines above $8 per bottle are growing, and more grapes from Lodi and the Delta are feeding into these wines.
    • Reduction of total supply from continued removals of older vineyards and of hard-to-sell varietals.
    • U.S.-produced wines have a home-court advantage in the world’s biggest and most profitable market.
    • Global production is down due to acreage removals in Australia and Europe, along with a lower than average South American harvest.

    Above $9 per bottle retail
    (Sourced from the coastal regions and some Lodi/Delta)

    Factors softening the market above $9 per bottle retail:
    • Strong dollar attracts imports, impedes California exports.
    • Brands retailing above $8 successfully using grapes sourced from the Delta and Lodi but farmed and vinified for higher end programs.
    • Increasing supply from newly bearing acres of Chardonnay, Pinot Noir and Cabernet Sauvignon.
    • A lot of new brand development domestically and globally to compete in this price range.
    • Consolidation of distribution is making it tougher to get wines to the consumer.

    Factors strengthening the market above $9 per bottle retail:
    • Small coastal harvest in 2015, especially for Cabernet Sauvignon, Pinot Noir and Chardonnay.
    • Consumers trading up and demand growing strongly for Pinot Noir, Cabernet Sauvignon, Chardonnay and premium red blends.
    • Redevelopment of older vineyards resulting in a more stable base of supply.
    • U.S.-produced wines have a home-court advantage in the world’s biggest and most profitable market
    • Continued removals of older vineyards and of hard-to-sell varieties.

Global bulk wine inventories are currently more in line with sales than they have been, especially at the low end due to the shorter crops in South America and reduced acreage in Australia and Europe.

Fredricks continued, “Business in general has been more risk averse and conservative in the aftermath of the great recession, and this has impacted long-term capital investment.”

He wrote, “Lessons learned from past robust speculative plantings—along with greater and faster returns for other less capital intensive crops like almonds, and general economic conservatism—could be reasons why there were fewer speculative acres planted between 2012 and 2015, which might keep the often dramatic supply swings to a minimum.”

Planting contracts are being offered in certain areas, however, though at a slower pace. Wineries also are currently contracting grapes for multiple years, but those contracts are shorter in length than in the past due to wineries’ concerns over price increases and growers’ concerns about cost increases.

“We have concerns about the cost of growing grapes when it’s hard for wineries to raise retail prices,” he said. “Instead of price hikes, many wineries are developing new, higher priced wines to raise their average selling prices.”

Continued strong retail sales at higher prices also have wineries focused on growing current brands. “This has increased competition for grapes and bulk wine, and wineries are paying ever-increasing prices and raising their cost of goods.”

He noted that the U.S. market is one of the few that is growing throughout the world, and it is still growing at higher price points. “Most global brands are looking for ways to penetrate this market, with wines selling for above $10 per bottle; but domestic wines have a home-court advantage in the world’s biggest and most profitable market.”

Consolidation of distribution and retail channels are also making it more competitive to get wines through the three-tier system to the consumer.

“The emergence of direct-to-consumer sales is helping relieve pressure for small and mid-sized wineries, but the channel is not yet large enough. The net result could be a margin squeeze from increased cost of goods in a very competitive consumer market,” Fredricks stated.

Land use, availability and water are other long-term concerns on the supply side. Recently, vineyards have been planted with better site-specific rootstock selection and superior trellis systems, and yields per acre have increased along with improvements to quality, he noted.

Growers have become more efficient with water use through drip irrigation as well.

The larger issue, however, is access to land. In the North Coast counties, increased regulations are making it more expensive and burdensome to develop new vineyard acres, causing delays.

In Paso Robles, a planting moratorium is still in place on new acres.  In most areas of the state, redevelopment of vineyards is starting again after a pause in recent years, but even this may not be enough. Wineries are turning to Oregon and Washington to capitalize on other growing regions.

The great divide between brands retailing for less than $9 per bottle, many of which are flat or declining in sales, and those selling for more than $9 per bottle, which are mostly growing, is affecting supply and demand. Fredricks wrote that the positive factors currently outweigh the negative factors.

Mendocino and Lake Counties and Suisun Valley
Most brands that market a Cabernet Sauvignon with a “North Coast” appellation source at least a majority of the blend from California’s Lake County and/or Mendocino County.

When brands that use a “Napa Valley” or “Sonoma County” appellation cannot obtain the grapes needed from those areas, they often turn to Lake and Mendocino counties for the 15% out-of-appellation permitted to AVAs or the 25% permitted to counties.

This lifts the grape market in Lake and Mendocino counties in times of shortage, but in times of excess, Napa Valley and Sonoma County brands often cut the out-of-appellation portion of their blends.

The current grape and bulk markets from the North Coast are being pulled in two directions: Upward pressure on prices comes from the light 2015 coastal Cabernet Sauvignon crop, retail sales growth and high prices for bulk wine and grapes in Napa and Sonoma.

There is downward pressure on prices as buyers seek to control cost of goods and continue to explore sourcing from competing regions in the Central Coast and Lodi.

In the short-term, the upward pressure on price is stronger than the downward pressure.

However, significant new plantings, some speculative, went in the ground in Lake and Mendocino counties between 2013 and 2014 and should lead to an increase in quantity in 2016.

In addition, some new plantings were designed for higher yields with better rootstock, increased vine density and better trellis systems.

The wet winter provided many growers ample water for the 2016 growing season, but water is still a concern long-term. A consistently warm spring led to early and uniform bud break—on average, two clusters per shoot, which appears to be an average crop.

In summary

Fredricks noted that 2016 is shaping up as an average year at best. “An average year would be really welcome for Chardonnay and Pinot Noir.”

In summary, the outlook for the California wine industry looks pretty good, and while Fredricks listed several reasons the industry has been more cautious, none of these appear strong enough to upset the current trends in the foreseeable future.

The full report contains great detail about other varieties and regions. It is available for $1,350 per year at turrentinebrokerage.com.

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