Washington Wine Industry Pursues Ambitious Goals

Largest producer Ste. Michelle predicts vineyard acreage will quadruple

by Peter Mitham
wine Snoqualmie vineyard washington
Ste. Michelle Wine Estates, owner of Snoqualmie Vineyards (above) says the number of acres under vine could reach 200,000 in Washington state.

George, Wash.—Coming off its biggest harvest in history, the Washington state wine industry is quietly pursuing an ambitious agenda as it consolidates its position as the nation’s second-biggest wine region.

As the state’s largest producer, Ste. Michelle Wine Estates believes the state could ultimately host 200,000 acres of vineyard, nearly four times the current acreage of approximately 56,000. Given a 2016 harvest of 270,000 tons, such a dramatic increase in acreage could easily put the state closer to 1 million tons, if the dreams come to fruition. Moreover, with Wines Vines Analytics reporting 747 wineries in the state, growth is in fair balance with an estimated production of 15 million cases (this compares to a production of 4.2 million cases from Oregon’s 713 wineries, and the British Columbia Wine Institute’s own figure of 4.8 million cases produced by British Columbia’s 275 wineries).

Indeed, last year’s harvest was so great that some industry veterans suggested a proportion of the crop may not have made it in. While winter damage sustained this past winter and a cool spring means a similarly abundant vintage is unlikely in 2017, wineries continue to invest in new facilities.

Ancient Lake Wine Co. LLC is in the second phase of building a 2.5 million-gallon facility in George, Wash., which will add a 40,000-square-foot bottling and warehouse facility this year. (See “Adding Wine Capacity in Washington.”) 

Construction is proceeding on a number of smaller facilities, from premises for Bartholomew Winery and Palencia Wine Co. at the Columbia Gardens development in Kennewick, Wash., to former Hogue Cellars winemaker Co Dinn’s new winery in Yakima, Wash. Double Canyon expects to complete its new facility in West Richland, Wash., this summer, while in Walla Walla, development of the Eritage property is advancing north of town and planting continues at the SeVein properties across the valley in Oregon.

Development of properties on Red Mountain also continues, with both Duckhorn and the Aquilini family focusing on vineyard development. Terlato Wine Group’s purchase of Klipsun Vineyards last month highlights both the generational shift and ongoing investment taking place in the Washington industry.

While the sale of marijuana is legal in Washington, grapes and cannabis have so far been able to co-exist without the complexities and tensions present in some parts of Oregon industry. It’s not a question of better regulations, but a simple fact of the two operating in separate parts of the state: a high-level look at the distribution of licensed cannabis producers and processors in the state reveals a clustering of licensees in urban centres and along key highway corridors, including U.S. Interstate 5, Interstate 82 and Route 97.

There’s also attention to improving infrastructure aimed at keeping pace with best practices, such as the winery wastewater permit the state’s Department of Ecology is drafting. Comments from industry are being accepted through June 11, but many wineries are happy that only the state’s largest producers—only those wineries producing more than 7,500 gallons per year, or about 20% of the industry—will require one.

Shifts in how wineries reach markets inside and outside the stare are also occurring. State lawmakers recently tweaked legislation to let wineries have up to four offsite tasting rooms as well as one at the winery. Tasting rooms are important for building direct-to-consumer sales and shipments, something Washington wineries have seen increase 28% in the 12 months through March 2017, even as Oregon commands a lead in volume and per-bottle pricing (it’s a slightly different story through off-premise channels, where Washington leads in sales volumes if not per-bottle pricing; see “Oregon Leads in Wine Sales Growth Rate”).

With a view to expanding delivery capacity across the country, Railex Wine Services LLC announced last October that it would invest $10 million in expanding its state-of-the-art temperature-controlled warehouse and logistics center in Attalia, Wash., to 760,000 square feet: a 50% increase above the 500,000-square-foot facility built at a cost of $20 million just four years ago. It completed the expansion in April, and Ste. Michelle Wine Estates, the primary user, is filling the facility with finished product. Its partnership with Railex is a decade old, and Ste. Michelle aims to increase its distribution business to 5 million cases by 2018. (See “Ste. Michelle Gets on Track.”)

Wells Fargo analyst Bonnie Herzog observed in a report earlier this week that Ste. Michelle is a potential acquisition target for Constellation Brands, which last year picked up several labels from Charles Smith Wines after divesting itself of its holdings in Canada. (See “Constellation Sells Canadian Wineries.”) Constellation’s rationale for that purchase was a “focus on high-margin, high-growth brands,” something Washington has excelled in cultivating.

Herzog pointed out in her report that Ste. Michelle exemplifies these advantages—not only with its margins but also retail pricing that runs 5% above Constellation’s (according to off-premise sales data from Chicago-based market research firm IRI, Washington wines as a whole have an average per-bottle price of $9.80, second only to Oregon and well above the U.S. average of $6.37 per bottle).

“Ste. Michelle has solid mid-20% margins and a portfolio of mostly premium wines. In fact, according to scanner data, Ste. Michelle’s wine is priced on average at a nearly 50% premium” compared to Constellation, the report stated. “Given the ongoing premiumization efforts (Constellation) is undertaking, we believe an acquisition of Ste. Michelle would be very attractive,” the report said.

Wells Fargo believes an acquisition could occur within two years for upwards of $4 billion, which would make it the biggest deal in a region that has seen more than its share of big deals in the past five years.

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