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Regional Analysis |
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| October 10th 2007 |
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| California: The engine of American wine growth |
by Larry Walker
Ask about the American wine industry and inevitably the conversation begins with California. Larry Walker explores this all-important state, the fourth largest wine producer in the world, and looks at it within the US context.
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Any useful analysis of the US wine industry must focus on California, where about 90% of all US wine is produced. California is even more dominant in wine exports, producing some 95% of all US exports. In 2006, wine sales in the US, including imports, increased 3% over 2005, growing to 301m cases or 2710m litres, with a total retail value of $27.8 billion. California's share of that was 189m cases with a retail value of $17.8 billion, about two thirds of all wine sold in the country. Total shipments of California wine to all markets, including exports increased by 2% to 227.6m cases.
California may well be the driving force behind US wine growth, but it isn't possible to talk about California as if it were one wine region. California is at least as various as France and can be just as confusing to those trying to sort it out. At the beginning of 2007 there were almost 100 American Viticultural Areas (AVAs) in California, with many more proposed or pending. In terms of volume, the state is the fourth largest wine producer in the world after France, Italy and Spain, producing more than 225m cases of wine in 2006.
Many regions in one state
Napa may be California's most famous wine region, but there are also wines made from the Mexican border in the south to Lake and Mendocino counties in the north, from the Pacific Ocean in the west to the lower reaches of the Sierra Nevada mountains in the east. In general the coastal regions are where the best wines are made. These include the North Coast (north of San Francisco including Marin, Sonoma, Mendocino, Lake and Napa counties) and the Central Coast (south of San Francisco almost to Los Angeles, including Santa Cruz, Monterey, San Luis Obispo and Santa Barbara counties). There are also excellent wines from the Sierra foothills and the northern reaches of the Central Valley, especially in the Lodi American Viticultural Area (AVA).
The Central Valley, a large inland region between the coastal mountain ranges and the Sierra Nevada mountains, produces huge crops of wine grapes, making up more than 60% of the state's planted vineyards. The wine, for the most part, goes into bag-in-box wines and other everyday table wines. This geographical range has led to a wide diversity in growing conditions as well as varietals. Matching grape varietals to soil and climate has been one of the key goals of viticultural research in California for the past several decades. Soils over most of the state are a jumble of volcanic, older marine sediment and gravelly alluvial fans that have been shaken and stirred over millions of years because of earthquake activity.
Distinguishing the areas
US wine producers, led by California and the Pacific Northwest, began a serious attempt to sort these diverse growing areas with the introduction of the AVA system in 1977. The AVA system differs sharply from the European appellation system. AVAs have no regulations regarding grape variety and crop size nor do |
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Regional Analysis |
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they make any quality claims. There are two kinds of AVA. The first is a simple political statement, such as California or Napa. This means only that the wine has come from the area designated. The second level makes a geographical distinction, such as Napa Valley or Carneros. At this level there is, theoretically, an underlying similarity of soil and climate which should produce wines related in character.
While this is the ideal, most would agree that most AVAs are too inclusive, becoming political or marketing statements rather than meaningful expressions of terroir. However, as the process is refined, more and more AVAs do accomplish this. Good recent examples include the Green Valley sub-appellation of the Russian River Valley AVA in Sonoma and the Santa Maria Highlands AVA in Monterey.
Following the end of Prohibition in 1933, viticulture in California (and the rest of the US) tended to be a one-style-fits-all design. It didn't matter what varietal was being grown or the site of the vineyard, vines were all pruned the same and planted in wide spaced rows for ease of cultivation. Winemakers trained at the University of California at Davis and elsewhere were taught that soil was relatively unimportant. The vine was regarded as a green 'factory' that produced grapes virtually from sunshine and water.
Viticulture and oenology were regarded as distinct areas of study. Winemakers were not encouraged to venture into the vineyard and growers were rarely welcomed in the winery. There were, of course, exceptions to the rule, but that was the general regime. It wasn't until the 1960s that more growers and winemakers began to question this approach and experimented with rootstocks, pruning and other techniques. By the 1980s the old mantra 'all you need is sunshine' had been discredited; it was clear that soil did make a difference and the best winemakers were spending more time in the vineyards than in the wine lab. This has led to a major increase in wine quality. The state learned its lesson just in time. The intense competition of the global wine market has increased the drive for quality at all price points and California has become a major player in the world market.
"With the strength of other currencies against the dollar, California is more competitively priced," says Joel Peterson, winemaker, Ravenswood Winery. "As a result, international markets are seeing more Californian wines at a higher quality level."
The export equation
In 2006, California wine exports totaled $876m, an increase of 30% in value over 2005. Volume, at 404.5m liters, was up 4%. The average price per case of bottled exports was up 38% to $27.15 (€19.98), reflecting not only the surge in premium wine sales, but the practice of shipping cheaper wines in bulk for bottling at the source. The growth of bulk wine shipments has been one of the key changes in US wine exports in recent years. American bulk wine exports to the |
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United Kingdom and Italy combined soared from 570,000 equivalent cases in 2002 to 11.2m equivalent cases in 2006. In comparison, bottled exports to those countries fell from 10m cases in 2002 to eight million cases last year.
These bulk exports make it difficult to track US wine exports, since the wines are often bottled in one country and re-exported to another. A case in point being Blossom Hill, a Diageo brand shipped in bulk to Italy, bottled there and then shipped to the UK.
The big players: Gallo and Constellation By far the leading exporter of bottled wines is E&J Gallo. In 2006 through November, Gallo shipped 11.6m cases, more than all other bottled wine exporters combined. However, Constellation Wines US is steadily gaining ground, growing by 16% last year. Constellation is the only other producer shipping more than two million cases.
Gallo and Constellation both seek to dominate shelf space by offering a huge array of brands. Gallo has 26 brands in almost 100 countries while Constellation has about 60 brands in 70 countries. The UK, Europe (especially northern Europe), Japan and Canada are the driver markets for Constellation. Markets like the Caribbean and Mexico, are identified as 'opportunity' markets. Constellation has targeted China for further development and is showing strong interest in India.
Constellation's top premium brands include Franciscan Oakville Estate, Mount Veeder Winery, Robert Mondavi Winery, Simi Winery, Estancia Estates and Ravenswood wineries in California and Columbia Winery in Washington State. Mid range offerings include Covey Run from Washington, Inglenook, Robert Mondavi Private Selection, Talus Collection, and Woodbridge by Robert Mondavi from California. Some of the lower range wines include Paul Masson, Echo Falls and Taylor California Cellars, all California brands. Echo Falls and Paul Masson are strong performers in the UK at the competitive £3.99 price point. There are indications that price points of £5.99 and even higher are opening up in the UK, generally regarded as the most competitive wine market in the world. This would open the way for other Constellation brands, like Mondavi Woodbridge, Mondavi Private Selections and Ravenswood. Although Gallo does not disclose specific market information or make sales projections, they appear to have mastered the art of slotting the right brand into the right region. Important Gallo brands in Europe are Sierra Valley, Gallo Family Vineyards and Redwood Valley, all brands at the lower end of the mid-price market, although there is an occasional spotting of premium lines like Gallo Sonoma, Rancho Zabaco, Bridlewood, Louis Martini and Mirassou. Gallo has begun shipping bulk wine, a change from previous policies but perhaps the only way to make the necessary price points. They seem to have largely walked away from the premium market in Europe, although they still sell premium brands in Canada. In Japan and Asia, Carlo Rossi is the major brand, a 'value' wine |
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sold as a 'jug' wine in the US and rarely seen in Europe.
The export markets
Gallo, like Constellation, has problems in the UK. However, the importance of the UK market and the export market in general for Gallo was underlined last year when they named Brian Carlisle international vice president for Gallo global sales, and based him in England. It is quite rare for Gallo to step outside their Modesto operations and appoint an 'outsider' to such a key role, especially an outsider more at home with food marketing than wine marketing. The difficulties with the UK market are not Gallo's alone.
"Californian wine does not have a quality image with the average UK consumer, and is vastly under-represented in the £6-to-£10 category," says John McLaren of the UK office of the Wine Institute of California. "The weak dollar helps, but unless California can conquer the mid-price sector and enhance its own 'brand equity', it is not well placed to weather a currency resurgence."
US wines have a market share of 16% in the UK, compared to France at 16.4% and Australia at 22.3%. The California brands driving the market are various Gallo bottlings and Blossom Hill, a Diageo brand. Fetzer, especially its Bonterra label is also strong, as is Ravenswood and Echo Falls, both from Constellation Brands. Premium rosé is also a strong point for California in the UK as well as the rest of Europe.
Canada, the second largest export market recorded a strong gain of 29% in value for 2006. Rick Sloomka, Wine Institute's Canada director says increased sales in Quebec were especially encouraging. He also says the province had always been a difficult market for California wines, adding that a step up in promotional campaigns by many California wines may have led to the growth there. Brands doing well in Canada include Canada Gray Fox (Wine Group), Liberty School, Rodney Strong and J. Lohr According to trade sources the Wine Group's Fish Eye brand has recently made a successful launch in Canada. Other strong growth areas include China, up 53% by value, 44% by volume; Singapore, up 68% by value, 79% by volume and Hong Kong, up 19% by value, 42% by volume. Delicato and Wente are both strong brands for California in Asia.
Joe Rollo, director of the International Department at Wine Institute in San Francisco is strongly optimistic about export growth. "I expect compound export growth of 10% to 15% over the next three years. I see strong growth continuing in Europe, Canada and China." He adds that sales to China have doubled over two years ago. "And it's real business, it's not a matter of bringinig in bulk and dumping it at low prices. South Korea is also up and we are doing good business again in Singapore. There's been a slow but steady increase all across Asia. We are also seeing a strong comeback in Mexico."
Although there is a lot of interest in the |
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Regional Analysis |
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developing wine market in India, Rollo is not as upbeat about it. "This market will take a while. The tariffs are still exorbitant. India recently lowered the spirits tariffs, but increased wine tariffs."
While the export picture is generally bright for US wines, importers are steadily gaining market share. Import share of the market is hovering at around 30%, an historic high. And it seems certain to grow, according to a report from the Wine Market Council. The report shows that US wine consumers aged 21 to 30, often called the Millennial generation, prefer imports to domestic wines by a margin of 63% to 37%.
Of all importers, the turnaround in French sales has been the most remarkable. In the patriotic fervor post 9/11, French wine sales plunged. In 2006, they were on top, up 25% from 2005. France isn't the only importing company scoring strong gains. Argentina, Italy, Spain and New Zealand all posted strong 2006 gains. It is not surprising that virtually every wine producing region in the world is targeting the US market. It is the fastest growing market and will soon be the largest; also, Americans spend more on a bottle of wine than anyone else. It's the price of success.
What lies ahead
For the short term, the California (and US) wine business would seem to be in good shape, although there are long-term problems that growers and winemakers need to be thinking about. The first concerns land use, coupled with California's rapidly growing population. Housing development and shopping centers are being built next to vineyards and winery operations. In 2002, Wine Institute and the California Association of Winegrape Growers (CAWG) produced the Code of Sustainable Winemaking Practices. The Code is designed to not only encourage sustainable agricultural but to make wineries and growers "better neighbors" to suburban and exurban home owners who are less than thrilled to wake up to the sound of a mechanical harvester at 4 a.m.
It is a step in the right direction if it leads growers and vintners to consider the environmental impact of growing grapes and making wine. However, the code is voluntary and too often used purely as a public relations tool. Then there's the potentially devastating impact of global warming, especially considered in conjunction with water use. The vast majority of California vineyards are irrigated and many of those would probably not be economically viable without irrigation. At the same time, water is in increasingly short supply in the state, due to growing urbanisation and temperature increases.
Many farsighted winegrowers are exploring ways to make deep cuts in water use or even farm grapes without irrigation, a common practice in coastal areas up until the 1970s and the introduction of drip irrigation.
Leaders in the dry farming movement, such as John Williams of Frog's Leap Winery, argue that wine made from grapes grown in irrigated vineyards do not truly reflect the site. Other issues include labor shortages and maintaining a balance of grape supply and wine demand, issues affecting many other wine growing regions as well. But for wine producers who can manage these issues, the future looks promising, thanks to the increasing interest in wine inside the USA.
"Wine consumption in America reached new heights in 2006, as a growing number of adult consumers drank more wine than ever before," says wine analyst Jon Fredrikson, the publisher of the Gomberg-Fredrikson Report. "Wine's positive image, its extensive media exposure with scores of stories about the potential health benefits of moderate wine consumption, and the widening distribution of a vast range of appealing wines broadened the consumer base."
Eric Morham, senior vice president of international sales at Constellation Brands agrees, also pointing to an increase in disposable income. "In the US, the $12-15 price segment is the fast growth part of the market," he says. And Morham believes as people become more discriminating, they will continue to buy better wines. "Once you trade up, it becomes more difficult to return to a wine without the nuance and flavour of the premium wines."
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