Wine Industry Looks Past Recession

Sacramento, Calif. -- While the tanking economy cast a pall over Washington, It
was hardly all gloom and doom at the 2009 Unified Wine & Grape Symposium, which
began Tuesday in Sacramento. A preliminary attendance tally approaching 12,000
was up from 2008, many speakers and Unified veterans remarked on the overflowing
ballrooms, and navigating the immense trade show required sharp eyes and
dexterity. So much for reduced business travel.

During Wednesday morning's general session, three wine industry experts analyzed
the State of the Industry from three perspectives: that of the grower, the bulk
wine market, and of consumer wine sales. A picture of an industry balanced in
supply and demand, weakened by recession, but facing positive long-term trends
emerged.

State of grapegrowing

After years of surplus in the winegrape industry, the 2008 harvest came in
slightly below average, completing the current cycle that started with the large
crop of 2005, according to Nat DiBuduo, president of the Allied Grape Growers of
California. Of the 3.58 million tons of grapes harvested in the state, 2.9
million tons were crushed for wine. (By comparison, 3.68 million tons were
harvested in 2007, 3.25 tons of them for wine.)

"Based on our future needs, we needed to produce at the trend line or slightly
below the trend line, and we did," DiBuduo said. To continue this equilibrium,
the 2009 harvest would have to come in at 3.49 million tons, and the figure for
2010 would be 3.59 million tons. "The ups and downs of the market can be scary
for growers. We're all afraid of the ups and downs of the industry."

2009 nursery survey

Several major California nurseries agreed to participate in a confidential
survey in January. The data they gathered helped Allied Grape Growers determine
that new planted acreage will total between 14,000 and 18,000 this year. Red
varieties represent 59% of that figure, while 41% is planted to white varieties.
Thirty-six percent of the vines sold were Pinot Noir, while Chardonnay claimed
the No. 2 spot with 22% of the vines. Pinot Grigio (16%) and Cabernet Sauvignon
(13%) were the third and fourth best-selling vine varieties. 

According to the survey, 21.5% of vines were sold to vineyards in regions known
for producing high-priced wines. Fifty percent went to mid-range regions, while
28.5% were planted in areas known for their value wines.

Of the more notable findings, more than 85% of the Pinot Grigio sold went to
areas known for producing value wines, and while wineries are offering
contracts, their numbers are slowing. Meanwhile, nearly 70% of Sauvignon Blanc
vines went to high-price areas, but contracts are less common.

Managed growth

The current "hot" plantings, Pinot Grigio and Pinot Noir, may be reaching the
saturation point in regions that aren't known for these varieties. Meanwhile,
DiBuduo predicted that more traditional varieties may be on the verge of a
resurgence: Chardonnay, Cabernet Sauvignon and Merlot (maybe). But rather than
rush to the nursery, he advised growers to keep in mind the cardinal rule of
winegrape growing--managed growth. "I would definitely hold off planting
Cabernet until we understand the (economic) issues better."

People in no other industries are content with simply breaking even, and
grapegrowing should be no exception, DiBuduo said. Growers should be compensated
for their efforts and build in an 8-12% annual return on their investment when
figuring budget lines.

In terms of contracts and sales, DiBuduo stressed that the current economic
situation may be gloomy, but planting done now won't reach the consumer in wine
form until 2011, when consumer confidence likely will be in a different place.
"When wineries say times are tough, they're putting wine on the shelf that was
made three years ago," he said.

To view more of DiBuduo's presentation, visit
alliedgrapegrowers.org/present.html.

Bulk-wine as barometer

Bill Turrentine, whose California-based Turrentine Brokerage facilitates the
international market for grapes and bulk wines, compared running a wine company
to flying an airplane.  Just as it's difficult for laymen to comprehend how a
jumbo jet can become--and remain--airborne, seemingly defying the law of
gravity, in many ways the wine industry defies the laws of economics.

Even though for the short term the economy appears dire on most fronts, he said,
this contrasts with long-term trends for the wine industry. While a pilot must
give priority to short-term crises-- "If you don't, you don't survive"--it's
also vital to keep an eye on long-term trends, he urged.

Turrentine pointed out that the current trend, which sees consumers trading down
in wine purchases, "Hurts some, but it helps others."  Today the industry faces
reduced restaurant wine sales; the all-too-possible threat of California's
proposed "nickel-a-drink" excise tax on alcohol beverages; liquidity challenges
to both borrowers and investors, and water problems to come with the now
seemingly inevitable drought. So far, so dismal.

On the other, long-term hand, he continued, there will be economic recovery.
Some experts predict this may take three to five years; Turrentine's sunnier
forecast is 12 to 24 months. Another bright spot for wine producers is the
millennial generation, which appears to have adopted wine as a beverage of
preference. Its youngest members are now only 15 years old, so the wine market
may expect a growing clientele for at least the next six years.

Finally, Turrentine suggested that the global trading trends that he follows
bode well for U.S. producers. Recent harvests and vineyard planting trends
indicate that most larger overseas producers, including Chile, France, Italy and
Spain, are seeing average to reduced crushes; only Australia has excess
inventory.

"Today, there is no real excess" in global wine inventory, even as consumption
continues to grow. Lacking a record crop like that of 2005, California is likely
to be short on some varieties, notably Chardonnay, within five years, Turrentine
said, as he rolled his well-known Wheel of Fortune onto the screen. This
venerable tool illustrates the cyclical nature of grapegrowing excesses and
shortfalls.

Unlike the last two recessionary periods the market has endured, Turrentine
said, we entered this current rendition having absorbed most of 2005's gigantic
grape crop, and instead will most likely need to look ahead to meet market
expansion after economic recovery. This, he pointed out, "Is much healthier.
It's a huge help." Once we've survived the short-term turbulence, in other
words, the wine industry can expect a soft landing.

View from the marketplace

Despite an economy that began to plummet in 2008, California wine sales eked out
a gain of 2% over 2007 in cases shipped to the U.S. market, for an estimated
total of 196 million cases, said Jon Fredrikson, principal of Gomberg-Fredrikson
and Associates. Wine from other states grew by 3.4% to 26 million cases.

California wineries shipped 3.9 million more cases to U.S. customers, and
boosted their exports dramatically, partly due to exchange rates that made
domestic products bargains overseas. With sales up by any amount in a down
economy, the news certainly carried a positive ring, but it was muffled by
drastically dropping on-premise wine sales and drooping shipments of high-priced
wines.

Members of the National Restaurant Association reported that their wine sales
"went off a cliff" in July, Fredrikson said, and his survey of shipments from
high-end wine warehouses in Napa and elsewhere confirmed the trend.  Nearly one
half of restaurant operators expect their sales to decline in the six months
that began in November.

"Frugality has now become hip in American culture," he observed, as consumers
who normally splurge on luxury wines have lowered their sights.

The main growth brands of 2008 were overwhelmingly those in the under-$7,
every-day wine segments, which account for 61% of the market for California wine
by volume, Fredrikson said. He named one company with plenty of business in this
price range his winery of the year, E & J Gallo. Gallo's Barefoot brand saw the
largest increases in revenue and volume of all brands in food stores last year.

By varietal, domestic Chardonnay in food stories had strong growth of more than
6% over 52 weeks ending Jan. 10, being strongest at $6 and under.  Cabernet
Sauvignon in food stores grew at almost 10% in the same period, and was strong
at both low and relatively high price points. Francis Ford Coppola Presents was
No. 1 in revenue increases in food stores for Cabernet. Pinot Noir continued
hot, achieving a growth rate of 11% in 52 weeks. Much of this was in the $8 to
$10 range; again Gallo led with its Mirassou brand. The Merlot market did not
grow but remained huge in volume.

Imports had been gaining market share in the U.S., growing "enormously"  since
1991, Fredrikson noted, but in 2008 they dropped significantly for the first
time, due largely to the strong euro which made imports more expensive here. The
euro increased in value about 80% since 2001, and then dropped 19% since last
summer, by his calculation, leaving vintners and the trade guessing about what's
next.

Not a nickel

Fredrikson also spoke out against what he called the erroneously named "nickel a
drink" excise tax proposed in California to help the financially challenged
state government. Since the proposed tax of $3.04 per 9-liter case would be
levied at the winery level, it would result in the tax being doubled at the
retail level and tripled at restaurants. Trade members will keep their usual
markup formulas, raise their prices, keep the extra margin, and profit from the
tax, he predicted, while wineries will pay the taxes.

"So the state only gets one half to one third of the actual surtax increase," he
said, "a wasteful and inefficient revenue mechanism detrimental to both industry
and consumers."  The excise tax will hit lower priced wines especially hard. He
calculated that the popular 3-liter boxes of wine could see retail price
increases of more than 50%.