Tougher Sledding for California

After a phenomenal decade, California's wine sales have dipped onto the glide path and there's some frantic brainstorming going on to navigate a soft landing.

Like every agri-business, wine's always on a supply-demand tightrope, and today's slippage comes on a banana-peel of tanking global economy, dot-com hangover, brutal competition from Australia and Chile, a grape/wine oversupply, high inventories, price resistance, and the war chill on travel, hotels and restaurants.

Even at the el-cheapo level, in the US winemakers' backyard, upstart "Two Buck Chuck" ($1.99 and 2 m cases in year 1) is hurting established brands.

"It's selling by the carload," says Jon Fredrikson of Gomberg, Fredrikson, leading analyst of US wine trends. "Another headache is imports like Yellowtail from Australia, growing at 80% a year! Australia's now the #2 importer behind Italy, ahead of France."

One way back to heaven is increased exports, and Canada, at 3.4 m cases, with California at 9% of LCBO sales, is the #2 market after the UK, so we'll see some heavy marketing. "There are hundreds of players with new ideas and a new dynamic," says Fredrikson. They're eager to increase the $385-billion Canada-US trade!

With fewer customers beating down winery doors, the industry's shedding its high charges, allocations, and bulk imports, and adding discounts, promos, new brands, sales at cost to airlines, and more winemakers wooing new markets in person.

Total US wine sales, 250 m cases and 6% growth in 2002 (3.4% in California) have slid from the Nineties' 11%-12% explosion and goals of 300 m cases by 1990 (reality:150 m).

However, driven by "Dream Market" projections, California did see a planting spree of 239,000 acres, says Fredrikson. And, thanks to a red-hot economy, a string of wonderful vintages ('90-'97), good demographics (lots of 20- to 40-year-old wine fans), wine missionaries like Robert Mondavi, and positive wine/health studies, wine consumption, and prices, did soar.

To the point that, because of wine shortages caused by phylloxera (80% of Napa Valley has now been replanted, Sonoma is still replanting) and Pierce's disease, and high demand, the industry almost ran dry in '96, importing 20 m cases from France and Chile to maintain brands. Supply was replenished by '97 and now there's too much, though Fredrikson is quick to say "oversupply", not glut, definitely not wine lake, adding that one short harvest now (there's a short crop every 10 years) or a dollar shift could change everything.

Meanwhile, even stars like Mondavi are struggling. Shares have dropped from $60 to $20, the firm is paring jobs by 10% and has 1,500 acres and two production facilities on the block. Another blue-chipper, Kendall-Jackson, will sell you 900 future vineyard acres in Napa, Sonoma and Santa Barbara. It’s been a roller-coaster since the Paul Masson Chablis jug wine and sherry era, with quality increasing yearly, driven by demand for quality and value.

Vines are being grubbed up by the thousand in inferior sites like the baking-hot Central Valley and good new clones today go into in cool coastal sites, aided by satellite and infra-red photography and every hi-tech device known to man.

Today, 10% of the American population consumes 88% of the wine, helped out by another 15% with the rest. Of that consumption, 3% costs over $25, 8% $14-$25 and 20% $7-$14, the hot segment, with 69% below $7. People are spending more on better wines.

Chardonnay's still king, at 26% of sales, with Merlot 15%, Cab Sauvignon 12%, White Zin 8%, and Sauvignon Blanc 3%. The future holds huge new plantings of Pinot Noir and Syrah, considered the "next" Chardonnay.

Imports have hit a record 62 million cases, mainly from Italy, Australia, France, and Chile. "The US is the world's 3rd largest market, with low duties and easy access, and we expect even more import competition," says Fredrikson. "However, our 2001 vintage is superb, an advantage over the Bordeaux '01s, to help kick start growth. And don't forget that our industry is still in its infancy and improving all the time."

Things will be fierce, though. Bordeaux prices could slide again despite the good quality and low quantities of the 2002s. Last year saw drops of 20%-40%, courtesy of weaker $ vs euro, feeble stock prices and war. Good news for us wine buyers!

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