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Glut Check

Posted on  | January 22, 2013   Bookmark and Share
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An abundant 2012 vintage in California may bring unexpected effects.

Northern California finally enjoyed a bountiful crop in 2012 after two years of underwhelming harvests. Does that mean California wine prices are going to go down? Actually, the opposite appears to be true. Get ready for higher prices on many Napa and Sonoma County wines, even though winemakers were scrambling for extra tank space just a few months ago.

This may seem to contradict the principle of supply and demand. But the 2012 California harvest is just a tiny piece of a global puzzle.

Global undersupply is a new phenomenon, and it affects everything. From 1979 to 2007, global wine consumption never exceeded production for more than one vintage, and even then only slightly, according to OIV (the International Organization of Vine and Wine). But in 2007 and ’08, global wine consumption jumped far ahead of production, and the world’s biggest wine companies—most with properties in California—still haven’t caught up.

Undersupply wasn’t obvious for California wines, after a big 2009 harvest, but it is obvious now. Even if there will be more 2012 premium California wine eventually, the 2010s and ’11s are what’s hitting the market now, and those are
in short supply.

Allocation Situation

Tim Persson, CEO at The Hess Collection, says his winery’s flagship Cabernet has been on allocation for the past year. Hess had been making 7,500 cases annually of Hess Collection Cabernet Sauvignon but could only manage 5,000 cases in both 2010 and ’11. “That enabled us to take price increases and we’ve seen little effect on demand,” Persson says. “We’ve been able to increase our case FOB by about $20 in the last year and a half. It’s closing in on a 10% increase that we’ve been able to take over the last year.”

It’s not pure profiteering from wineries, though, because northern California growers demanded—and got—more money for their grapes this year after suffering through consecutive small, lesser quality harvests in 2010 and ’11.

“In some places on the North Coast, the Cabernet price [for 2012] was as high as anyone had seen,” notes Nat DiBuduo, president of Allied Grape Growers. “All the wineries wanted them, and the crop was not expected to be as big as it was. It got a little competitive. I had people calling me and saying, ‘I want to buy the grapes I buy every year, but if Joe Blow winery doesn’t want to buy his grapes, then I want them, too.’”

Industry analyst Barbara Insel of Stonebridge Research says even without higher prices for grapes, wineries had been putting off price increases because of the soft economy. “Last year, the smarter wineries did things to hang onto their prices…to keep moving the volume,” Insel says. “Strong brands are going to want to increase pricing this year.”

One factor keeping prices down has been the proliferation in recent years of “overnight brands”—brands created quickly to take advantage of quality grapes that were available on the bulk market. If those brands spring up like weeds, the small 2010 and ’11 harvests were like Roundup.

But like weeds, the overnight brands will eventually be back, though not until after this year’s price increases. “In 2011, there was no Cabernet to be had,” Insel says. “In 2012, there’s going to be a healthy supply of grapes for negociant wines. This is going to be a big harvest. People are comparing it to 2005.”

It’s important to remember that California is huge, with a bigger change in latitude from north to south than France, so a good harvest in one region doesn’t mean everywhere enjoyed the same conditions.

For example, Santa Barbara County vintners said their 2010 and ’11 vintages were perfectly good while the North Coast was plagued with rain and mildew. And in 2012, while Napa and Sonoma vintners were celebrating, farmers in the San Joaquin Valley—which supplies 85% of the grapes in California, according to Bronco Wine Company CEO Fred Franzia—were enduring an off year.

Franzia points out a simple reason that Napa Valley’s harvest dominates the news. “Napa has 500 public relations workers,” Franzia says. “In the San Joaquin Valley, I think Gallo has one. That’s how they get all the press. They work harder at it. Napa has carved out a PR niche with 500 people pretending the whole universe of wine moves around them.
It’s a myth.”

Thinking Global

In fact, globally minded Napa wineries will be paying attention to prices elsewhere. The 2012 harvest across Europe was down about 15%, according to OIV. That could lead to higher prices for European wines that will make Napa wine price increases seem less onerous.

“If you look at global wine supply versus consumption, there’s a global 3% undersupply,” says the The Hess Collection’s Persson. Moreover, of major world bulk wine producers, only Chile had a slightly larger harvest than usual. Neighboring Argentina, which had been sending shiploads of Malbec, was down more than 20% in 2012.

Joel Peterson

“There seems to be a worldwide shortage of the varieties that are most desirable,” says Joel Peterson, a senior vice president at Constellation Wines. “Everybody brought in bulk wines from various places, whether it was Malbec from Argentina or stuff from southern France. Quantities are down, and that forced up prices for grapes. Those prices are more likely to be reflected in bottle prices for smaller wineries than in larger wineries. The strategy for larger wineries will be to work on market share.”

Peterson doesn’t foresee many private labels this year, though he says if 2013 is another large California harvest, that may “open the floodgates.” However, he does expect the trend of new brands from big companies like Constellation to accelerate.

“Every large winery has decided that much of the growth in the market is coming from NPD—new product development,” Peterson says. “As a consequence, you’re seeing more new brands that are in the $10 to $12 range. That will continue because they’re looking for the next Cupcake, they’re looking for the next Apothic Red. This isn’t necessarily tied to available volumes [of grapes]. They can shift volume from less successful products to more successful products.”

Pricing Sweet Spots

All the large companies seem to be licking their lips about the continuing sales growth in the $10 to $20 market, and the $20 to $30 market as well. Treasury Wine Estates just announced a major “Project Uplift” intiative, including buying more vineyards, to take more of its wines into those price brackets.

Persson says that owning vineyards allows larger companies to ladder their wine pricing much the way Detroit once priced automobiles, with the Cadillac above the Buick above the Chevy.

“We control the fruit that we use, so we can control the quality,” Persson says. “That incentivizes us to get consumers to trade up. We want to increase the percentage of revenue we get and the way to do that is to increase the percentage of higher-end wines.”

Scenes from the 2012 harvest at The Hess Collection, Mt. Veeder, Napa Valley

And he’s not worried about consumers being there. The task for larger wineries is to build brand loyalty; capitalizing on it will take care of itself.

“In the last five years we’ve seen consumers seeking more value for money,” Persson says. “But with the recovery of the economy, you’ll see people trading up. They may use the same consumer tendencies they’ve used over the last five years, but they will trade up.”

At the very high end, though, most experts expect that this is not an era for $75+ wines from little-known California wineries. Consellation’s Peterson expects that $30 to $40 is the price ceiling for new wines from smaller wineries.

Insel says, “Smaller brands have had a hard time getting traction in this market. It’s a very conservative market. If consumers are going to pay $75, they want to know what they’re getting.”

In that price bracket, Napa Cab remains the king, according to Insel. “If they can’t get something from Caymus or some other known brand, they’ll look for another Napa Cab rather than something else, because they know Napa,” Insel says. “Every time we do any wine research, the only wine region people really recognize is Napa. Somebody will look at a wine list and say, ‘What do you have in a Napa Cab?’”

To Fred Franzia’s chagrin, those 500 PR workers are clearly doing something right.


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