Monday, September 2, 2019

Wine Supply is Entering Unknown Territory



Grape Supply Cycles


The wine business runs in cycles when it comes to planting. Trying to guess which grapes are needed and just when they are needed is a trick, especially when it takes 5 years to get a fully mature yield. And it's impossible to predict planting decisions effectively without making some guess on demand.

We have been through excess before, but the cycles aren't always created by the same circumstance and this one is unique.

      Shortage with Demand Growth


In the middle 1990s, there was such a strong demand for wine, grape shortages were widespread and grape prices rose rapidly. In our bank's client base, it was common for wineries to run out of bottled wine, well before the next vintage could be bottled.

Mondavi started to import Chilean bulk wine for the first time in large volumes to help fill demand. I remember one client from the era, now gone who told me, "I only sell wine to people I like. If I don't like them, they don't get my wine." That was a unique time and those circumstances haven't been seen since.


In response, during that same period planting exploded. At a point, I became concerned about the speed at which sticks were going in the ground, so I researched, developed and published the nearby chart.

We were, in my estimation, close to having supply balance at a macro perspective by 1998, and didn't need to plant anymore. But we still kept planting because there weren't enough grapes.

There wasn't great analytic science behind the development of the model. I didn't have perfect shipment information, especially since I was trying to convert shipments backward into tons. I had to make some educated guesses and make some estimates especially on restaurant sales, then create a forecast off of that. It was at least useful. Looking back 15+ years, it was probably more accurate than I knew at the time because we did move into an ear of oversupply exactly as I'd guessed.

That was a supply whip. We went from being short on supply to be quite long in what seemed like an instant; the combination of The Tech Recession, 9/11, wholesaler changes and massive non-bearing acreage - each adding to compound the problem. Demand for wine was still moving sharply higher, but not quick enough to absorb all the grapes.

Since then, we've gone through several cycles due to long or short harvests in regions but in the background, we've been watching the annual growth rate in wine slow to the point where at present, total volume demand for wine on a trailing 12-month basis is no better than zero, based on several sources.

      Excess with Slack Demand


Today, wine supply is moving into unknown territory. We have now reached the point where we have a large and unhealthy excess in grape supply in all price segments. The factors creating this however are unique and nothing like the extended oversupply period of the late 90s and early 00s. We've not experienced this set of circumstances before and that means the responses that worked in the past, may not work this time.

From a demand perspective, we are seeing negative volume growth in those regions that produce wines that are positioned below $9 at retail. That's an issue that's been well documented.

More recently though, volume in higher price point regions has shown zero to minimally positive growth rates, and luckily still modest positive growth in sales dollars. On a volume basis, we are close to hitting slack. We haven't seen negative volume growth since 1994 in the business, but we are very close to that today. 

It would be great if we had short bulk supply, empty storage tanks, and we were looking at a light harvest. But talking to brokers and vineyard managers over the past 6 weeks, there is unanimity of opinion that even on the North Coast, we will leave fruit hanging on the vine this harvest. Not everything is contracted. And the early consensus for yield is we are picking out at average, to average-plus yields.

It's probably not a surprise given those facts that we are seeing much lower prices paid for uncontracted grapes - if there is a buyer for those grapes. That mirrors price drops on the bulk market too. There just aren't enough buyers.

With wineries full of supply and short on demand, we will see a modest number of contracts expire after this year without being re-upped at current prices. I don't have a gauge on a number but that's a consistent response I'm getting today from producers.

      Coping with Supply Excess


How will grape growers cope with the supply issue? That's where we are in uncharted territory. In the North Coast in days past, vines could be pulled early that needed replanting, moderating additions to supply. Growers could also drop fruit they might let hang in better times. And in a doubling-down approach, some growers have crushed uncontracted fruit and hoped for a return when price improved in a year or two.

The problem with those strategies is they all depend on seeing better volume demand growth within a short time. Making projections of increased demand in the next couple of years is becoming increasingly more difficult under the circumstances discussed.

And on the third strategy above, crushing uncontracted fruit will probably add costs that you can't recover in two years. That's a short way of saying that this current cycle can't correct itself in two years.

In the Southern Central Valley during long periods of excess, vineyards can be been pulled and replaced by pistachios, almonds, and pomegranates. Growers can and have moved on to something else; the benefit of diversified farming approaches. In the Central Coast, some of the heavy production vineyards can be replanted as well.

What about the North Coast? How will supply and demand equilibrate to stabilize price if demand on a volume basis doesn't improve longer-term? Growers on the North Coast don't have profitable alternative crops to plant. Long gone are apples, pears, walnuts, prunes, and poultry. There are less expensive places to farm than Northern California and those crops have found those locales.

The question many are asking is, "How long will the imbalance last?" Under the circumstances, I don't have an answer that is encouraging. My guess isn't one anyone will like, so I think I'll sit on that prediction for a while.

There Are Solutions But They Take Time



The best solution to excess supply isn't pulling vines. The solution has to be improving demand, but that will take time and will be painful for growers in the interim.

This is a topic that I covered in a recent blog as well as the Annual State of the Industry Report but is too extensive for this post.

The short treatment is there are essentially two things that are needed to improve consumer demand for wine and lower the gulf between that and grape supply:
  1. Consumers are reducing wine consumption because of health concerns. We need to push back on the cumulative negative health messages from neo-prohibitionists that defy the findings that moderate consumption of wine is more healthy than abstinence. The science is there and has been proven accurate. The California Wine Institute used to have several technical positions supporting this goal and we need to bring that function back. We need other wine organizations in the West to climb aboard that objective too. This is both a policy and a marketing issue.
  2. We have to evolve the way we market. We've proven successful in marketing to boomers, but we still have to engage young consumers. That's not an either-or proposition. We need to hold on to existing customers AND attract new ones. The strategies there are many-fold and we need to faster implementation of those prescriptive strategies. 

What's Your Opinion?

  • How are you responding to this harvest?
  • Are you renegotiating contracts?
  • If you feel like I'm overplaying the current circumstance, feel free to push back.
Please join this site on the top right-hand side of the page, and offer your thoughts below. I respond to everyone.

Please share this post on your favorite social media platform. We need to heighten the discussion of this topic.

47 comments:

  1. I've been around long enough to remember all of these cycles. I agree that refuting the neo prohibitionist message is important but no permitted wine company is allowed to discuss health benefits. Hands are tied and we have to find friends like you that are not restricted from spreading the word.
    I think that beverages other than wine, will continue to erode market share of all adult beverages and are more appealing to the younger generations.

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    1. Liz - thanks for the comments and your are of course technically right in your perspective. Wineries can't claim health benefits. But the Wine Institute can promote the existing science that's out there and refute the paid "science." At one point in the 1990's, my understanding was there were 5 people taking care of that.

      Beyond that, the AVA Marketing Associations can evolve their messaging. There are words that are associated with health that spirit companies are employing. Words like GF, Non-GMO, natural, low-sugar, etc. We need to speak the language that's resonating with consumers and evolve.

      You are also right that the competition is from spirits and beer. Consumers today drink across categories. There is premium alc. beverage everywhere you look. I hope you are wrong when you say they will continue to erode share.

      In the world I'm championing, we will have increasing share and total volume growth because wine will have perceived (and scientifically valid) health benefits.

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  2. The laws of supply and demand are immutable...per a recent movie title “There will be blood”. The gently unspoken wisdom of many in the trade is that trouble is already here. Speculation is that the big players will profit in a long term play as they acquire financially-strapped properties at great discount.
    Tighten up the belts, gonna be an interesting 2-3 years, esp if/when a recession muddies the horizon.

    Joel

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    1. Thanks for the post Joel. I am hoping the large wineries will add more mass marketing to wine and help improve the category.

      Personally, I don't believe we are headed for a recession. If indicators change, I might change my view. But we have low growth in GDP still and a stock market that's volatile but at record prices. It's a stronger economy than the rest of the world, but I will agree that's not a strong statement.

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    2. Joel:

      You write:

      "Speculation is that the big players will profit in a long term play as they acquire financially-strapped properties at great discount."

      Tim Fish at Wine Spectator addressed this back in 2013 when he spoke about wineries seeking an "exit strategy":

      Excerpt from Wine Spectator Online
      (November 12, 2013):

      "West Coast Wineries Are Up for Sale -- Quietly”
      (A wave of recent deals show investors see opportunities in wine, while owners see an exit strategy.)

      URL: http://www.winespectator.com/webfeature/show/id/49221#.UoI_yAMMzG8

      “. . . While small wineries can succeed by selling most of their inventory direct to consumers and large producers have muscle with wholesalers, those in the middle -- annual production of 5,000 to 15,000 cases, for example -- can’t get much attention from distributors unless the brand is hot.”



      W. Blake Gray addressed this back in 2017 when he wrote about mid-sized wineries being given the cold shoulder by distributors:

      Excerpts from The Gray Report
      (July 31, 2017):

      "Wine trade secrets revealed at OIV Wine Marketing Program"

      URL: http://blog.wblakegray.com/2017/07/wine-trade-secrets-revealed-at-oiv-wine.html

      "John Collins, CEO of a company called GreatVines that sells alcohol distribution software, started the week off with a slap in the face to all wine companies: 'None of the wine companies are getting any attention (from distributors). Period. Because the spirits companies are that important to the distributors.'

      "Collins compared the profit size of Diageo, a huge spirits company, to Jupiter. Gallo, the largest wine company, is Neptune. And if Gallo doesn't matter to a big distributor like Southern Glazer's, no wine company does.    . . ."

      "The opposite of Constellation was a presentation by Bruno Walker, director of sales and marketing for Chambers and Chambers Wine Merchants, a California distributor with an outstanding fine wine portfolio. 

      "Walker was one of several speakers to caution people that large distributors won't do much to sell wines by small wineries. 

      "'If your wine is not on some kind of special of the month, it won't sell' at a big distributor, Walker said. 'That sales person is not out making presentations of your wine. Their manager is telling them, you've gotta sell this and you've gotta sell that. That's how their bonuses work. That's how they're hired and fired.'

      "But Walker also chilled expectations for what a distributorship like his can do.

      "'The reality is, I have 15,000 unread emails,' he said. 'Most people are really, really busy.'

      "He said that when his salesmen present wines to stores or restaurants, they only have about 45 seconds per wine. 'We have to be able to deliver a compelling story, quickly,' he said."

      ~~ Bob

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  3. Do you see slack demand as potentially causing growers to become more interested in growing cannabis? Particularly in the North Coast?

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    1. Steve. I was waiting for that question. The answer is no. Regulations don't presently allow that and taking on cannabis as a crop has as many - probably more risks compared to wine grapes. Ask any grower in Oregon and Washington how they feel about supply and price of marijuana today. It's not what they expected.

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    2. From National Public Radio (aired August 14, 2019):

      "California's Largest Legal Weed Farms Face Conflict In Wine Country"

      URL: https://www.npr.org/2019/08/14/747441997/californias-largest-legal-weed-farms-face-conflict-in-wine-country

      Subject: a fungicide sprayed on wine grapes -- if it drifts onto nearby planted cannabis -- makes the latter unfit for sale, as state law precludes cannabis having any trace of fungicide or pesticide in it.

      Link to state law guideline chart:

      https://bcc.ca.gov/about_us/documents/17-261_required_testing_chart.pdf

      If you as a vineyard owner pivot to growing cannabis, your crop can be ruined by your wine grape growing neighbor's fungicide spraying.

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    3. Rob, I agree with your response, and also it's easier, cheaper, and faster to grow Cannabis indoors. Outside of more artisinal strains, it won't make sense to replace wine with Cannabis, and even the artisinal can be grown elsewhere, so it doesn't need to replace.

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    4. Marc - You misspelled your first name. Anyway, thanks for the comment. Living in Napa and watching the regulatory dance on cannabis, I hadn't thought of the indoor versus outdoor options for cannabis growers. I would think that would limit both smell and cross contamination.

      Either way - you don't need to plant very much to satisfy demand. The growers in Oregon have discovered that.

      I'll be interested to see how Napa deals with allowing marijuana as a crop. It doesn't have to be grown in Napa to be used by residents or tourists, but I can see how someone might want to profit off the Napa brand that's been created.

      Do we next allow tourists to visit the grows, like I went to see a dairy farm in 3rd grade? Does the wine community cross market at events where weed is sold?

      I don't have good answers but am open to several outcomes. I just know that growing cannabis isn't going to be a salvation for current vineyard owners. Next I can go into the story of my first year in banking where a borrower ripped out all their pear trees and planted Jerusalem artichokes ... but thats a story to have over a glass of wine.

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    5. Indoor grows make more sense, but that's not necessarily what's going to happen. If you want to see 'ground zero' for cannabis versus wine grapes, check out what's happening down here in SB County. There are serious 'challenges' with the two industries co-existing, at least with the extremely lenient policies the Board of Supervisors has enacted (and is now having to walk back on). Cheers.

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    6. Tercero - thanks for staying engaged. This is falling off topic a little but I agree with your point. The regulations in SB County had holes that allowed stacking permits to grow, and allowing a very large grow. I can't imagine being a winery trying to serve high net worth clients with skunk odors flowing through, and view sheds of white fences and heavy security.

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    7. Now here is the flip side of this agricultural conflict: an Oregon vineyard suing in federal court its cannibis farm neighbor "over fears the grapes were contaminated with the smell of marijuana."

      "Alleged marijuana damage to grapes ruled plausible"
      Capital Press online - posted September 4, 2019

      URL: https://www.capitalpress.com/state/oregon/alleged-marijuana-damage-to-grapes-ruled-plausible/article_a95ce280-cf68-11e9-8b22-67ef35339263.html

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  4. Great post, Rob! Yes, we've seen these cycles over and over in the wine industry, so this isn't particularly novel to the old hands at this. Still alarming, especially with the addition this time being the flattening of demand. All signs of a maturing industry, including the consolidation of wine companies we've recently seen. I am a little surprised by the severe impact we're seeing in the bulk wine markets. I would have thought that regulations limiting planting we've seen increase over the last 10-20 years would have a softening impact on the emerging oversupply, but you wouldn't know it to see bulk wine prices and offers without a bid currently.

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    1. Hi Dan. Thanks for the comment. I suspect the greatest question to answer is how long this imbalance will last? Growers are in a difficult spot as they thus far haven't marketed wine. That's been the producers and marketing association's jobs. We need to be more aligned as an industry on solutions.

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  5. Rob,

    You have been consistent on your marketing needs in our industry. I sat on the CAWG Board for the last 9 years and have tried to push the grower industry to get behind some kind of campaign that markets wine as whole. We have been blessed, spoiled and frankly ignorant to the fact that the market is changing. We bash millennials and lament an older boomer generation...and do nothing about real promotion! Truly is out actively and creatively bashing wine a liquor in advertising because they are trying to keep their own market share with hundreds coming up with the same products!

    We growers and wineries are going to lose money...so why not actually budget and spend $50-100/acre or $.05/case and get it into a national campaign that makes wine hip, refreshing and healthy and not pretentious and intimidating. It's time for real change if we want to be relevant for a long time. Lets face it this is a world wide market and when you can land wine here cheaper than we can grow it...and the consumer doesn't care where it's from...its a problem for our industry! It's time for change and WE have to do it...there is not going to be any miracle shift. My two cents from Monterey...
    Jason

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    1. JES - Spot on! At various times at least back to 2012 I've discussed returning to a USDA marketing order - the type that has proven successful for Calfornia Almonds, California Cheese, and California Raisins (Dancing raisins.)

      The political issue is the larger producers are the ones bearing the burden of cost, and looked at myopically - they don't always see letting others spend their money to grow the pie as smart. They would rather spend money on their own brands.

      I would argue the pie needs some growth today but I'm not sure I have agreement, even though the top 7 largest producers had volume declines in aggregate last year. We may have to suffer more before we come to agreement on actions.

      That said - we are talking about a volume issue. We are talking about slack demand across multiple supply categories - bottles, corks, vineyard supply, distribution ... pretty much everyone in the supply chain is being impacted by this current trend. It takes leadership to pull those disparate groups together to look for solutions. I'm presently pondering what that might look like.

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    2. JES:

      You suggest "the grower industry . . . get behind some kind of campaign that markets wine as a whole."

      Recall the "Got milk?" broadcast television advertising campaign?

      Guess what.

      It didn't work.

      Domestic milk consumption fell despite the ad blitz.

      "The End of Got Milk?"
      The New Yorker online - posted February 28, 2014

      URL: https://www.newyorker.com/business/currency/the-end-of-got-milk

      Excerpt:

      "In October of 1993, the California Milk Processor Board, with the help of the advertising agency Goodby, Silverstein & Partners, launched . . . the first of many Got Milk? advertisements, which most often featured celebrities with milk mustaches. Two years later, the Milk Processor Education Program (MilkPEP), the national promotion arm of milk processors like Dean Foods and HP Hood, licensed Got Milk? and distributed it nationwide. By the mid-nineties, ninety-one per cent of adults surveyed in the U.S. were familiar with the campaign.

      . . .

      "But there has been a problem: Got Milk? didn’t actually get people to buy more milk. The daily consumption of fluid milk -- as opposed to milk-based products like cheese, yogurt, and butter -- has steadily declined from 0.96 cups per person in 1970 to 0.59 cups in 2011. . . ."

      . . .

      "As of Monday [February 24, 2014?], the Got Milk? campaign is pretty much dead. . . ."

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    3. [DELETED AND REPLACED TO CORRECT FOR A TYPO.]

      Regarding the California Raisins TV campaign, the salient question that the California Raisin Advisory Board marketers had to ask themselves was: will the incremental lift in sales revenue (if achieved) exceed the incremental cost of producing the TV ad campaign?

      This is the challenge with every advertising campaign for commodities. History demonstrates few succeed.

      (Aside: the Claymation singing and dancing figures and the music recordings spun off from that TV campaign were clearly a success. But "public awareness" was not the goal of the campaign. Increased unit sales for a stagnant commodity table fruit was the goal.)

      "History of the California Raisins"
      Food & Wine online - posted September 17, 2016

      URL: https://www.foodandwine.com/fwx/food/california-raisins-history

      Citing the Wikipedia entry:

      "Although popular with the public, the California Raisin campaign eventually failed because its production cost the raisin growers almost twice their earnings. CALRAB, the organization who made the campaign, was also closed on July 31, 1994, due to disagreements with raisin producers over the fairness of required payments to the organization."

      URL: https://en.wikipedia.org/wiki/The_California_Raisins

      The basis for the Wikipedia citing on the campaign's production costs is this article:

      "The Raisin Situation"
      New York Times online - posted April 27, 2019

      URL: https://www.nytimes.com/2019/04/27/style/sun-maid-raisin-industry.html

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  6. Great article Rob. The obvious short-term impact would be in grape prices. Any glimmers in your crystal ball as to 2019 and 2020 prices? Will there be a dip, and by how much?

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    1. Gordon. Thanks for the question. Obviously you are asking a broad question. The answer to that depends on non-bearing acreage, demand for a varietal, and several other specific factors.

      I haven't done that digging yet - but that's a goal as I begin researching the Annual State of the Industry Report. But I can tell you that prices are dipping across all regions to some extent already.

      That doesn't however mean that every grower will lower price. Some growers produce fruit in high demand or have historic relationships with producers to flatten out cycles. Location matters.

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  7. Thanks for this post, Rob. We have a limited vantage point, as our company has only been around a few years (we're an online grape & bulk wine marketplace). However, we have made several observations over the past few months that echo many of your points:
    -Substantially more premium fruit is coming online; many new users are expressing that this is the first time they've had uncontracted fruit in decades...or ever.
    -Many folks who were very active on the platform last harvest as buyers are returning exclusively as sellers this time around (another point: this time last year, nearly 2/3 of new user sign-ups were buyers. Now, that has nearly perfectly flipped where the majority of new users are sellers).

    We're an early stage company that's growing, so it's difficult to assess market trends based on our data alone. However, we've likewise seen decreasing spot-market pricing (we hope that our pricing reports, which also include aggregated data from partners and other publicly available sources, help provide a bit more actionable info for growers and producers to leverage around spot market pricing).

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    1. Thanks for the response Justin, and for recognizing the early nature of your data. We all have to know the weaknesses in what we do to give fair indication of our findings.

      In your case, and with only a cursory review of your site, I suspect you are also seeing an interesting phenomenon of sellers asking for higher pricing, because they don't want low pricing impacting published data. The important information is with closed contracts and sales.

      We see the same thing on the bottled side of things with retailers posting lower prices and switching out when they get an interested buyer ("I'm sorry. We're fresh out. But can I interest you in .... ") And in auctions, we see producers who prop up price for the same reasons. Perception matters.

      Good luck in the business and thanks again for posting.

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  8. Same AVA Assn did change strategy years ago and hedged elsewhere.

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    1. I don't understand your statement Roger?

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    2. After the last grape oversupply in early 2000's our Assn took action and found new markets elsewhere that have benefitted us greatly for well over 10 years now and much less impacted by CA winery inventory. It was a hedge put in place to buffer the cycles that produced for us here a $70/tn offer way back then.

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    3. Thanks for the clarification Roger. Obviously $70 a ton isn't sustainable. I'm glad you found other markets.

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    4. apparently $9,000 per ton is not either

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    5. $9k is on the high side for all but the best producers.

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  9. Washington State is estimated to be 15 percent over planted with demand reductions from some large players. Many growers are faced with planting over to other crops as you mention, which may be necessary in the near term. Oregon appears to be under planted based on bulk wine demands, but only marginally so with some fruit remaining unsold each year.

    The wine industry, like the arts, has banked on marketing to a stolid aristocracy that is diminishing quickly as its primary patron. Those who are most nimble and creative, branding experiences, cultural enrichment, and inclusion are already showing dynamic growth.

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    1. Adam - I have light data that supports your Washington thesis for production destined grapes. I don't see the same issue for smaller estate producers on the whole.

      In Oregon, we still are showing good demand growth,but I haven't reviewed what's non-bearing yet to have an opinion.

      This is a shared issue though. Growers are going to suffer most because we aren't sufficiently moving the needle on demand. Wineries will get lower priced fruit in the interim, and that may be a silver lining if wineries are able to find high value fruit to grow new labels for entry level consumers.

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  10. Hi Rob,
    This was an excellent read. I have visited Napa/Sonoma twice in the last month and noticed that there seemed to be a lot of replanting of vineyards going on. I have not seen as much since phylloxera hit. Could this be one response to excess wine on the market?

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    1. John - You are correct. Vineyards have about a 25 year life plus or minus. In the middle 1990's we were going through replants in Napa and Sonoma because of the issue with AXR1 root stock that wasn't phyloxera proof. So we are running up on the end of useful projected lives of many vineyards and growers have to make decisions on the timing of the replant today.

      Taking older producing vineyards out of production when the contracted price falls below break-even is an easier decision. I don't think we are at that point in the vast majority of cases. We are near the end of useful lives in some cases.

      At a point, the costs of farming and lower yield for a producing vineyard also become important factors in making that rip versus farm decision.

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    2. Don't forget re-configuring for automation as the labor force is non-existent.

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    3. I was told (by a Bordeaux grower whose name escapes me) that they replant at about 45 years of age.

      The notion that North Coast vintners are already replanting at 25 years of age is both surprising and troubling.

      Will the next replanting cycle be at (say) 15 years of age due to regional warming, pushing Bordeaux varieties to the sidelines?

      (Aside: It does not escape one's attention that Touriga Nacional has been proposed for planting in Bordeaux.

      Back in the 1800s, "Syrah from Hermitage was sold to Bordeaux . . . to help improve their wines in light years, giving the wines darker color, more structure and backbone."

      Source: "Rhone Valley Complete Guide Cote Rotie Hermitage Chateauneuf du Pape," The Wine Cellar Insider)

      "Bordeaux winemakers allow new grapes to fight climate change"
      Decanter magazine online - posted July 2, 2019

      URL: https://www.decanter.com/wine-news/bordeaux-new-wine-grapes-419730/)

      "The end of Cabernet in Napa Valley?"
      San Francisco Chronicle online - posted August 16, 2019

      URL: https://www.sfchronicle.com/wine/article/Napa-wineries-confront-climate-change-by-planting-14308512.php

      -- and --

      "Saving cabernet from climate change"
      Morning Ag Clips online - posted August 22, 2019

      URL: https://www.morningagclips.com/saving-cabernet-from-climate-change/

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  11. Rob,
    Another spot on post. We have not won the hearts and wallets of young consumers. And good wine is more expensive than good beer or spirits. My concerns are we have built a cost infrastructure that will not allow wine to be more competitive on price and we persist in selling wine like it is 1999. Some cultural intervention a la the movie Sideways or 60 Minutes French Wine Paradox aimed at young consumers is needed along with good value, great quality wine.
    Keep up the good work.

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    1. Anon 10:48. Thanks for the post. The French Paradox and the Mediterranean Diet, as well as other work by Arthur Klatsky (http://www.epi.umn.edu/cvdepi/bio-sketch/klatsky-arthur-l/) were instrumental in having boomers recognize and adopt wine because of health benefits. We need to re-ignite that discussion as today, its having water poured on it from paid science funded by neo-prohibitionists.

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  12. Hey Rob,
    Great post. I've been chatting with some folks that have been around the industry for several of these supply/demand dislocations, and the comment I'm getting most often is that 'this one feels different'. I couldn't agree more. We've always been able to rely upon the 'rising tide' or new categories (wine coolers, fighting varietals, white zinfandel, etc) to solve the problem. I'm feeling that the rising tide may be receding and the possibility of creating meaningful new categories in a crazily crowded and noisy market is unlikely (at least those which increase total consumption and not just shift it to another product).

    That said, there are opportunities for individual wineries. Those with a strong balance sheet, decisive and agile decision makers and good brand equity will likely do just fine over the next several years. You and I both know that many, if not most, of the wineries out there do not possess all of these attributes. For those that don't, the premium has never been higher on the basic blocking and tackling of business and sound financial decision making. Understanding the core value proposition around your brand and determining how to deliver this to your customers in the most efficient way possible is imperative. The next several years will require that most of us have a good look in the mirror and get very clear about what makes us desirable to our target market. We may have to ask ourselves if the way we've done business historically is indeed the best way forward. Those than can answer these questions should find a path forward and those that can't...well..

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    1. Thanks for logging in with your name Steve, and for the comments.

      Mark Twain is renowned to have said that he "once knew someone who drowned in an average 2" river." So when we speak in generalities - we should never miss the corners and segments. There is always money to be made.

      The wineries who are doing well today have professionally run businesses with staff that are paid and have goals. They understand sales means leaving the tasting room and going on the road - a lot, even if you are strictly DtC. They are finding segments that work for them.

      We will continue to find success IMO, but the headwinds make this a defining point in the long-term business of wine in the US. Change is good. Evolution is good. Doing nothing isn't good.

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    2. Steve:

      You write:

      “Those with a strong balance sheet, decisive and agile decision makers and good brand equity will likely do just fine over the next several years. You and I both know that many, if not most, of the wineries out there do not possess all of these attributes. For those that don't, the premium has never been higher on the basic blocking and tackling of business and sound financial decision making. . . .”

      Let me proffer again on Rob’s blog an introduction to this book on “basic blocking and tackling” to grow your business:

      “The Business-Building Tools Marketing Execs Ignore”
      Advertising Age online – posted May 31, 2005

      URL: http://adage.com/print/103337]

      “The Marketing Forum [address by] Michael Treacy . . . mapped out in his speech the most broadly applicable and compelling marketing manifesto I’ve heard.

      “The speech lasted an hour, and the book from which it was derived, ‘Double-Digit Growth: How Great Companies Achieve It No Matter What,’ is 214 dense pages in paperback, but here’s the Cliffs Notes.

      “Substantive business growth in Western corporations is rare . . . but entirely achievable. Not because there is a magic bullet (we all know bullets are bull), but because 10% or more can be eked out through discipline, hard work and attention to a handful of potential growth areas.

      . . .

      “FOUR AREAS OF FOCUS

      “Those areas include: 'share gain,' grabbing a percentage point or two at the expense of a competitor; 'base retention,' stemming the loss of existing customers to the point where your churn rates fall below the average; 'market positioning,' also known as showing up where the growth is going to happen; and 'adjacent markets,' whereby a marketer moves into a related business. Treacy’s research has shown proper attention to any one of these will contribute a few percentage points of growth. Put them together and what do you have? Yep, double digits.

      “A great overview and an encouraging message. But the audience seemed disheartened; several told me they found the speech 'depressing.' Confused, I quizzed a few, until one solved the riddle for me: 'He said marketing is a difficult way to grow a business.'

      “A NARROW INTERPRETATION

      “The penny dropped. By 'marketing' this executive meant the focus on 'share gain,' which Treacy did, indeed, say was by far the 'toughest way to grow.' In other words, the marketers interpreted their roles so narrowly -- as people who hawk for new business -- that Treacy’s message seemed to say they faced nothing but an uphill battle. His optimism about growth through customer retention, innovation and the identification of growth markets was lost on them.

      “This is a problem. A Spencer Stuart study showed CEOs expect the marketing department to drive growth, but many marketers are focused on only one growth avenue: customer acquisition. (And, worse still, on one tool to achieve that: purchasing, approving and post-justifying advertising).

      . . .

      “CUSTOMER RETENTION

      “Had Treacy encountered this issue? ‘Oh yes,’ he said. ‘Look at Detroit. They give away an average of $4,000 on every car trying to find new buyers, not to mention the billions they spend on ads. How much do they spend on base retention tactics? Almost nothing. Despite the fact that with a two-thirds churn rate, a small improvement would yield major growth. The marketing department doesn’t think that’s their job.’”

      . . .

      Delete
  13. One of the big 'challenges' here is that most of the large wineries have 'hedged their bets' with other alcoholic beverages themselves - and even with cannabis - and may not be as adversely affected as they might have been during the last over-supply cycle. And if these larger companies have been 'saviors' in the past and they may not be in the position to do so this time, who will?

    It also could mean that premium bulk wine on the open market will be purchased for much lower prices to be used in these other non-wine dominant products.

    I agree that our industry tends to be myopic - and to many, this has not 'hurt them' that badly in the past. That may not be the case this time . . .

    Cheers.

    ReplyDelete
    Replies
    1. Tercero - thank you for your post.

      I actually think that the Wine Group and Gallo will do all they need to to help build the category. It's to their advantage. If you read the press release from Gallo on the Constellation brand acquisition, there is a single line from Joe Gallo that says something to the effect that "they want to build the category." The Wine Group had an announcement earlier this year that talked about $300M going to rebranding Franzia.

      Gallo has always been an excellent category builder. I expect they will do just that again and be a huge help at the end.

      Delete
  14. Great post, Rob. Three points I'd like to make.
    This down cycle be longer and worse than previous down cycles because of a couple of additional reasons to supply and demand mentioned above. 1) We've never before seen an increase in the cost of farming like we are experiencing between now and 2022, when minimum wage will be at $15 and ag-overtime laws are shortening the agricultural week to only 40 hrs. Growers in North valley, south valley, & central coast currently just surviving selling grapes for less than $500/ton will not be economically sustainable in the short term as per acre production costs increase by 35-40% in the next few years. Grapes will come out of the ground.

    Secondly, a question: What role has institutional investment into new, large un-contracted plantings had on the over-supply situation? e.g. all of the new CS and PN on central coast?

    Lastly, Wine Institute needs to promote and spearhead a marketing order for CA wine, ASAP! Our education and marketing efforts for wine compared to the beer, seltzer, and spirits industries is like comparing the military spending of the Vatican vs. the United States. We all need to come together as an industry--the big wineries/growers and small wineries/growers alike. We can't depend on another 60 minutes French Paradox or a Sideways Part Deux to drive the next demand phase. We have to roll up our sleeves, open our checkbooks, and do it ourselves. It can be done with enough participation, cooperation, and vision.

    Thank you

    ReplyDelete
    Replies
    1. [DELETED AND REPLACED TO CORRECT FOR A TYPO.]

      Anonymous:

      You write:

      "What role has institutional investment into new, large un-contracted plantings had on the over-supply situation? e.g. all of the new CS and PN on central coast?"

      In the Central Coast, water rights tied to vineyards are the key asset -- not the vines or their harvestable fruit.

      "Meet the California Couple Who Uses More Water Than Every Home in Los Angeles Combined"
      Mother Jones online - posted August 9, 2016

      URL: https://www.motherjones.com/environment/2016/08/lynda-stewart-resnick-california-water/

      [Who got into trouble for clear-cutting thousands of native California oak trees to construct an above-ground irrigation pond at Justin Vineyards & Winery.

      "Paso Robles Winemakers Divided Over Water"
      Wine Searcher - posted June 20, 2016

      URL: http://www.wine-searcher.com/m/2016/06/paso-robles-winemakers-divided-over-water]

      -- and --

      "Harvard Spent $100 Million on Vineyards. Now It's Fighting With the Neighbors"
      Bloomberg online - posted November 15, 2018

      URL: https://www.bloomberg.com/news/articles/2018-11-15/harvard-spent-100-million-on-vineyards-some-neighbors-complain

      -- and --

      "Harvard Quietly Amasses California Vineyards -- and the Water Underneath"
      Wall Street Journal online - posted December 10, 2018

      URL: https://www.wsj.com/articles/harvard-quietly-amasses-california-vineyardsand-the-water-underneath-1544456396

      -- and --

      "California in overdraft"
      Palm Springs Desert Sun online - posted December 10, 2018

      URL: https://www.desertsun.com/story/news/environment/2015/12/10/california-overdraft/76372340/

      A backgrounder on vineyard dry farming and irrigation:

      "Drought revives ‘forgotten art’ at wineries: Farming without irrigation"
      Los Angeles Times online - posted November 22, 2014

      URL: https://www.latimes.com/business/la-fi-dry-farm-wine-20141123-story.html

      -- and --

      "3 Myths About Irrigation and Dry Farming"
      SevenFiftyDaily - posted December 19, 2017

      URL: https://daily.sevenfifty.com/3-myths-about-irrigation-and-dry-farming/

      Delete
    2. Anon 6:12 - thanks for your comments and addition to the dialogue.

      Farming costs and labor in particular are a concern for everyone. It's not just how much does it cost, but can I find labor at all?! No question that adds a dimension. Getting immigration reform would be one solution but that will take me down a rabbit hole.

      And yes, we will see the imbalance adjusted by seeing removals. They always happen at the margins with the weakest going early. In fact I had a conversation this morning with an industry insider in the Central Coast who said there were removals taking place as we speak. The timing is telling because grapes are still on the vine in many if not all of those cases cited.

      I want to be careful though about settling too much on the trends that are just ugly to watch. Because there are businesses that are doing quite well. It's not yet a train wreck. There is still time to evolve and work together on demand.

      The silver lining in any of these cycles is there will be good wine sold at lower prices. And price is an issue for the young consumer. If those higher quality wines find their way into $11 - $17 bottles, we will make a step in increasing demand from young consumers, which is paramount for industry health.

      Delete
  15. Rob, were you surprised that the price of pinot noir grapes in every significant CGCR region was down this year? Do you see this as an anomaly, a varietal oversupply, or a canary in the coal mine for the wider market? The weather could be different this time next year, but any thoughts/bold statements about where we stand now?

    Also, does that Nielsen overall revenue vs. volume growth account for imports or only domestic wine? If the former, that paints a grim picture for some domestic producers, especially with imports growing significantly in that "premiumization" range. If the latter, maybe our outlook is a little less gloomy in terms of demand stagnation? Am I off at all here?

    ReplyDelete
    Replies
    1. Anon 11:38. Thanks for commenting.

      I'm not surprised. Last year after harvest, it became pretty clear that we might see lower prices for pinot - and most other varietals. The only varietals that have positive volume growth in the past 12 months are Cabernet, sparkling wine, rose, and Prosecco.

      Nielsen accounts for scaned sales, including domestics and imports. Their data can be broken out though.

      Delete

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