Wednesday, December 29, 2004

Are Mid-Sized California Wineries Doomed?

When I look at the future of the California wine industry, I see a pretty grim reality for the mid-sized, family-owned winery (MSFOW - for discussion purposes, I'm going to define mid-sized as 50,000 cases and up). There are so many factors working against them right now that I can't help but think that many of them will fade into oblivion in the next 5 years. Why? here's a list of things you need to contend with, whether you're Groth (60,000 cases) or Bogle (600,000 cases) or somewhere in between:

  • Constellation, Diageo, Allied-Domecq, etc. are buying more wineries and growing the volumes of the ones they already own. Other big players, like Kendall-Jackson, Bronco, and Wine Group aren't buying wineries, but are steadily growing their own. The US wine market doesn't grow consumption fast enough (about 3% annually) to support growth from both the big guys and the little guys, I think the little guys are going to get squeezed out, either through pricing, portfolio leverage or distributor focus.

  • Foreign competition, principally Australia, New Zealand, South America and Spain, will continue to put price pressures on all domestic producers and the smaller wineries are less able to survive with lower margins. Its tough to make a small California winery work at $10 per bottle, and there's just too much good wine out there. If/when the dollar restrengthens, it will make it doubly hard for MSFOW's to compete.

  • On thing the Aussies and the 2002-2004 glut have taught us is that wine sold below $14 is pretty interchangeable (with respect to appellation) and can be made even more cheaply. Oak chips, micro-oxidation, fruit sourcing from the central valley, reduced hand labor in the vineyard, etc. have all allowed for cheaper production of sub $14 wines, particularly for those with 'scale', something MSFOW's don't have or are less likely to take advantage of.

  • The lack of progress in the direct shipping battle will have an impact as well. Even if the supreme court decides in favor of the wine industry, the decision will be too narrow to open up all 50 states to direct shipping. Some states, in fact, may close ALL winery shipping to consumers, even from wineries in-state.

  • Distributor consolidation is having tremendous impact on MSFOW's. In California, as in many states, the vast majority of wine is sold through two large wh0lesalers. If they already have 4 dry creek zins in their portfolio, why do they want to carry yours? This forces MSFOW's to push sales in their tasting room and wine club. Nice options, but loaded with hidden costs and sales usually come at another MSFOW's expense.

  • Last, the steep discounting we've seen recently will not go away quickly. Many MSFOW's have weathered 2002-2004 because they had healthy balance sheets and could take on more debt and inventory. These inventories won't go away quickly (like when you see somebody still selling a 2000 Merlot when everyone else is selling their 2001's or even 2002's). Consumers like the values they've gotten and will resist paying the prices they were paying in the pre-9/11 era.


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September 01, 2005 11:26 AM  

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