US: Wine industry survey highlights biggest challenges for US - report
Every year Robert Smiley, director of wine studies, dean and professor at UC Davis, surveys CEOs of several of the most prominent wineries in the US. Topics for this year's survey include strategies for dealing with the grape shortage, margin compression and price increases, as well as what they believe will be the biggest issues in the next five to ten years.
Survey respondents included Bruce Cakebread from Cakebread Cellars, Peter Mondavi from Charles Krug Winery, Chris Indelicato from Delicato Family Vineyards, Joseph Gallo from E&J Gallo, William Deutsch from Deutsch Family Wine & Spirits and several other CEOs.
Responses to the questions were given anonymously.
Most wineries are seeing grape shortages, especially in Cabernet and Moscato grapes, according to Smiley. Bulk prices have gone up and, as a result, wineries are paying higher prices for grapes, extending and establishing contracts with growers, sourcing grapes from off-shore, utilising a broader appellation and planting new vineyards.
"The three big boys, Gallo, Constellation, and the Wine Group, now can satisfy what we'll call the under-US$6 wine category. They have really gone off-shore. For the first five months of the year, the bulk imports have more than doubled. If it keeps the current pace it will be equivalent to importing around 175,000 tons of additional volume over the previous year. To me that's a staggering number. And when you look at a 3.5m ton crush it is a significant amount."
"We have a fairly well-established set of long-term grape contracts that have shielded us from short-term grape pricing fluctuations. We have also gone off-shore. For example, no-one predicted the popularity of Muscato, and California can't really supply the demand. So our strategy there is we contract some of our supply and we have gone off-shore to mitigate some of the cost increases. But, if your demand exceeds the supply that you are contracted by then you have to go into the market to buy the wine and that hurts margins."
"I'm not sure if there is a grape shortage. They are saying that plantings are at a historical low but all my comments are referencing Napa Valley. For Napa Valley, while wineries want to refill their inventories, I think it is a reaction to two short crops, rather than a grape shortage. And I think a normal to slightly above normal harvest will be a game changer very quickly."
Smiley asked respondents if they are experiencing margin compression due to rising grape costs and stagnant wine prices. Most CEOs said they were and to combat it are increasing wine prices where they can, reducing operating costs, improving operating efficiencies and emphasising relationships with growers.
"No question, there is downward price pressure, although I will say that for the round of price increases that we took in January and February I had the least resistance from distributors that I can remember in thirty-some years." - A CEO with wine brands ranging from $14 to $20.
"We have not taken a price increase in close to ten years. But, during 2008 and 2009, when everybody was discounting, we held our prices where they were. I would imagine that, in the next couple of years, we are going to have to raise prices due to the grape market, inflation, and the cost of doing business." - A CEO with wine brands between $7 and $10.
"Because we are going to a wider appellation and lower priced brand in general, we are substituting, in some cases, oak staves for oak barrels. That is impacting our winemaking costs. Also, because we are going to ramp up production, we are able to negotiate a better glass contract. And, we are looking at contract labour for some of the pure labour areas." - A CEO with wine brands between $14 and $20.
Will consumers return to buying high priced wines at the 2006 and 2007 levels? Opinions varied greatly. Some respondents believe consumers will increase purchases of high priced brands as the economy recovers, with an increased focus on quality and authenticity. Some respondents believe consumers have traded down and "reset" their wine preference to lower price points.
"I still firmly believe that it is a new wine business. It is not totally new, but we are in no way looking back at how we did business and how things were pre-2007 at this company. I think it is going to be a new good time. But, the consumer has been trained to expect more, expect better wine, expect better deals, expect better attention, expect better reception, and those other little value add-ons that a customer-seller relationship has."
"We have actually seen some improvement in demand for those upper-end wines in the past eight months. Is it as strong as it used to be? No - it used to be that they flocked in and bought multiple cases. But, we have had some very good retail trends at the winery itself."
HOT FUTURE ISSUES
Most CEOs agreed that globalisation, government regulations, water availability and distribution/retail consolidation will be the biggest issues in the next five to ten years.
"The biggest concern is going to be the true dominance of the retailer. Total Wine, Costco, Safeway, Publix, etcetera, you name them - the top ten major off-premise retailers are absolutely going to determine who the winners are. I think that the little guy is going to get increasingly taken out of the retail discussion. There is going to be more emphasis on direct-to-consumer for the guys that are getting rationalised out of the retail sector; there is going to be a rise of more smart customer relationship management modules and algorithms. We are going to look more like Amazons than Gallos. At the end of the day, you're going to have to have a selling proposition; your wine is going to have to be worth waiting for the UPS driver."
"The biggest thing is the demographic shift that is going on. The two biggest demographic groups are the boomers and the millennials. As the boomers are getting older they are going to have less buying power or reduce their consumption. The millennials are adopting wine at a faster pace than we have ever seen. They seem to be a group of consumers that are motivated by different things. So, tapping into and understanding demographic shifts will be really important for us."
While most CEOs believe the US may not get back to the level of wine buying from 2006 and 2007, Smiley said that the survey had given him the most positive group of conversations he's had in the last five years.
This article originally appeared in Wine & Spirits Daily in the US earlier this week. For further details on Wine & Spirits Daily, click here.
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