At face value, the US wine market is recovering from a tough period, with the damaging surplus levelling out. But as Larry Walker discovers, the reality is not so bright, with continued pressure on margins and sales.

In the first six months of the year, total wine sales in the US grew by 7%, reaching almost 115m cases and a volume record for the first half, according to the Gomberg-Fredrikson Report, a respected industry source of statistics and commentary. California, which makes up more than 90 % of domestic production, grew by 4.5 percent while imports shot up 14%.

The numbers look good, but behind those numbers, a different story is being played out. The market is brutally competitive. In the words of one road warrior who markets several small premium California producers and a couple of imports brands, "It's a blood bath out there."

The reality is that heavy discounting and the growth of extreme value varietals (EVV) like Bronco's Charles Shaw (Two Buck Chuck) are draining millions of dollars out of winery and retail margins. While growers are singing the praises of 2Chuck and other EVVs, because those wines are beginning to drain California's surplus wine lake, retailers were calling those wines a disaster.

Bill Hayes, a wine buyer at the 31-store Beverages & More! chain in California said Two Buck Chuck is one of the worst things to happen to the retail wine business in his memory. Consumers lining up to buy 2Chuck by the case are not buying higher-priced wines that result in more profit for retailers and wineries. (The brand is sold almost exclusively in Trader Joe's, a chain of food stores for gourmets on a budget.)

According to The Gomberg-Fredrikson report, sales of the EVV wines in California alone amounted to 2.5 million cases in the first six months of the year, representing about 15% of all California wine shipments to the US market for the first six months of the year. Most of the EVV sales were cannibal buys, taking dollars away from brands in the $6-$10 range.

There are some who have tried to follow the optimistic yellow brick road, arguing that the EVV brands such as Two Buck Chuck have attracted consumers who rarely drink wine. There is little evidence of that.

The story has a similar plot line when it comes to imports. Australian sales surged by an amazing 48 percent in the first half, led by brands in the $5-$8 range, with {yellow tail} at slightly under a fiver leading the charge. In fact, the made-for-export brand is now the largest selling Australian wine in food stores. Not much joy for retailers at those price points.

If Australia should somehow stumble, there are plenty of other countries ready to step up. In the first six months of the year, Argentina imports gained 28 percent, New Zealand was up 38 percent and South Africa posted a 19 percent gain.

Robert Smiley, a University of California at Davis wine economist confirmed what those trying to sell wine on the street already knew: it is simply one of the toughest retail markets in years for the wine industry.

"Wineries are streamlining their business, vineyards have been forced to renegotiate contracts, and wine retailers are offering more promotions and specials," Smiley said in a report given to the Wine Industry Financial Symposium in Napa September 26.

Expert Analysis

Wine Watch - USA 2003
This comprehensive Wine Watch country report provides a thorough analysis of consumption trends in all wine categories. Clearly set out, it will help you to understand competitive relationships within the local market, brand dynamics and market structure and trends. It will also assist you in understanding Wine importance of international marketers in the country. Find out more here.


His report was based on a survey of 245 people in the wine business - including growers, winery executives distributors and retailers. The survey identified three major issues: the difficult retail market, the increasing power of the giant chains and club stores like Costco and the growing market share of low-priced imports. Of course, the limping US economy is not making it any easier.

What does the future hold? The good news is that the glut of cheap Central Valley bulk wine is almost gone and it is unlikely that giants like Bronco can continue to sell wine at $1.99 a bottle. However, now that the public has had a taste of drinkable plonk at that price, the pressure will be on suppliers and retailers to keep margins low, in the $3-to-$7 range.

Along those lines, Smiley's survey asked where the strongest sales growth could be expected over the next four or five years. Winery and vineyard participants expected top growth in the $20-plus market. Distributors and retailers, perhaps looking at the market from a more realistic perspective, said wines selling between $3 and $15 would show the strongest growth.

Also, while there has been a great deal of surplus wine sold off, there are problems remaining. Thousands of acres of vineyards planted in the late 1990s are just coming into production, especially on the Central Coast.

Smiley added that California was not along in having an oversupply of grapes. "The excess supply of wine is a global problem," he says. "It's not going away soon."