The 1990s were an excellent decade for the California wine industry. Robust economic growth and lifestyle demographics, generally favorable to upscale consumer products, benefited the premium varietal wine market and the peponderance of California producers who found themselves prospering in an extraordinary “sellers” market.
In 1999, the U.S. wine market reached the close of the 20th century up 5% from the previous year with the total including a huge (26%) spike in sparkling wine shipments destined for millennium celebrations. The market moderated to 3% growth in 2000, although shipments of table wine (including California, other states and imports) still hit a record high. Excluding coolers, the total U.S. wine market also reached a new pinnacle, in spite of huge declines for sparkling wines.
The trend of upscaling to better quality varietal wines remained a pervasive U.S. market driver, even as growth stalled slightly in the fourth quarter. Demand for high-end California table wines remained strong and premium wine producers with sufficient inventories generally enjoyed solid growth. Premium wine market leaders such Robert Mondavi, Beringer-Blass Wine Estates, Kendall-Jackson and Beaulieu Vineyard all posted strong increases from already large volume bases.
A Window of Opportunity
for Quality Foreign Producers
Although global wine production has outstripped demand for many years, much of the wine lake had little appeal to American consumers. Recent vineyard and winery upgrades have elevated quality in old world wine regions and in newly emerged exporting nations. A new wave of wine company investment across national boarders has intensified, producing savvy interntional exporting companies with marketing programs targeted at the U.S. In addition, the dollar reached its highest level in relation to the French franc and Italian lire in 15 years (when imports last captured their highest share of the U.S. market.). Importing companies capitalized on favorable exchange rates, and bottled still wine imports to the U.S. surged by 8.2 million cases in 2000. Although Italy, France, Spain, Germany all achieved market penetration, 40% of the imported table wine increases came from the Southern Hemisphere. Wines from Australia, Chile and Argentina all hit consumer-friendly price points in upscale packaging well suited for mass market on- and off-premise outlets. From a smaller base, wines from New Zealand and South Africa also attracted strong trade attention and consumer sell through.
A Look at Food Store Sales
ACNielsen/Adams Business Research food store reports illustrate the pervasive consumer shift upward in purchase patterns in 2000. Sales of all table wines $7 and above (American and foreign) advanced by 1.9 million cases (+22%), while everyday wines (below $7, and which make up 80% of food store volume) declined by 380,000 cases, or 1%. Most of these losses were in large-sized generic wines (jugs, priced below $3), which by themselves declined by 920,000 cases (-4%). Wines in the high premium range were only 20% of total volume but represented 43% of dollar revenues, while everyday wines were 80% of the volume but just 57% of the revenues.
According to ACNielsen/Adams, the greatest absolute volume growth in food stores was in the $7 up to $10 price category, which grew by 1.3 million cases, up 22%. Newly bearing vines primarily from California’s Central Coast became the foundation for “Coastal” brand line extensions hitting these price points from Mondavi, Beaulieu, Beringer, Callaway and Villa Mt. Eden. Other brands in this important niche include Meridian, Farallon, Hawk Crest, Indigo Hills, Rosemount Estates, Clos du Bois and Echelon from the Chalone group.
Brands at higher price points also grew rapidly. From a smaller base, wines in the $10 up to $14 category jumped 23%, while wines in the $14 and over segment climbed 18%. In contrast, wines in the fighting varietal price range of $3 up to $7 grew by only 3%.
Chardonnay achieved the largest growth among all varietals, gaining nearly 1.1 million cases, or 12%. Merlot was the second-largest gainer, growing by over 800,000 cases, or 17%. With an increased supply available, Cabernet Sauvignon sales climbed by over 500,000 cases, up 12%. Among other varietals, Pinot Grigio (+44%) and Pinot Noir (+20%) both grew rapidly, but White Zinfandel declined 5% in part because of cannibalization by low-alcohol, flavored varietals.
The Big Picture
With all its wealth relative to other nations, only one-quarter of U.S. adults are wine drinkers, according to recent Wine Market Council research. Exporting nations have always viewed this narrow consumer base for wine as an obvious marketing opportunity but success has been elusive. U.S. table wine consumption (including imports) remained smaller than dessert wine volume until 1968. Imported table wines that were about 26% of U.S. consumption at their peak in 1984, plunged in the last half of the 1980s to about 12% by 1991. This period saw the rise of California “fighting varietals” priced at ($3-$7 per bottle), which emerged from varietal planting excesses of the 1970s. That era’s weak dollar also benefited California’s finest high-end producers and California Cabernet appeared on East Coast wine lists that previously featured primarily Bordeaux. New premium wineries opened in coastal regions from Mendocino to Santa Barbara and California premium table wine grew substantially — but in a stagnant overall market. Interest rates were high, the dollar weak, phylloxera hit California’s most prestigious vineyard regions, and vocal anti-alcohol forces in the U.S. Congress threatened new “sin taxes” and onerous label regulations. Wine marketing was no fun and consumption languished.
Premium California table wine supply lagged the demand that developed as the U.S. economy strengthened in the ’90s. The surprise “French Paradox” broadcast health revelations blunted anti-alcohol sentiment giving the California Wine Institute, Women for WineSense and other industry groups research supporting more balanced legislative policies toward wine. A new wave of imported table wines packaged with consumer-friendly varietal designations gained ready acceptance.
In a 1983 benchmark study, Gomberg-Fredrikson & Associates segment California table wines into categories that have become industry standards. Wines below $3 per 750 ml bottle (mostly generic blends packaged in large sizes) made up the Economy or Jug wine sector. California premium wines were primarily those identified by varietal and selling above that level. This category was subdivided into Popular Premiums ($3-$7), Super Premiums ($7-$14), Ultra-Premiums ($14-$25) and Luxury wines priced at above $25 per bottle. At that time, GFA found that total premium volume was about 10% of wine sold but represented approximately $27% of winery revenues. By the year 2000, California premium shipments had reached 63% of volume and represented 87% of revenues.
At mid-year 2001, the California wine industry is in transition to a much more competitive environment. More and better wines are being made all over the world and many are in excess supply. Imports, which also rose significantly in the buoyant markets of the late 1990s, are once again at appoximately 20% of U.S. table wine consumption. Inventory supply and demand has finally reached a balance for most California producers and large increases are anticipated from newly bearing vineyards in 2001 and upcoming vintages.
As the U.S. consumer has continued to move upscale, California’s popular premium wines have largely taken the place of jug wines as “house pours” and form the foundation of most restaurant wine-by- the-glass programs. These wines when added to jug wines, now make up the “everyday” table wines from California and represent about 73% of California volume.
Chardonnay, now in abundant supply, and Merlot, also reaching high inventory levels, will become very competitive with newly popular imports in the $6.99 category this year. “High Premium” wines (everything above $7 at retail) will also benefit from expected drops in grape prices across most varietals in the upcoming vintage. The “ratchet up” effect that has characterized recent California wine pricing should mediate eventually in all price segments.