08.18.2015  
 

Does the California Wine Brand Need Help?

Slowing sales for lower priced California wines due to imports, consumer changes

 
by Andrew Adams
 
“wines
 
Napa, Calif.—In 2014, California wine producers shipped out 225 million cases worth nearly $25 billion, yet could the state’s wine industry actually need a little marketing help?

California wine sales are growing in the $10 and higher price segments, but the picture is not so rosy for manufacturers of lower priced bottles.

A strengthening dollar, young consumers who are constantly on the lookout for something new and exotic, and foreign wineries with ambitious plans to expand sales in the United States are some of the exterior challenges for the state’s wine industry.

For decades, affordable California appellation wine has been the entry point for millions of consumers across the nation. Recently, however, sales for wines priced less than $10 per bottle have not grown as fast as higher priced wines. Prices for grapes in the San Joaquin Valley have fallen in the wake of record harvests and diminished winery demand.

Earlier this year, a Wines Vines Analytics report about the off-premise market found that the wines priced higher than $20 per bottle grew more than 15%, while those priced $8 to $10.99 grew by around 6%, and sales for wines less than $8 all declined, according to data provided by the market-research firm IRI. Wines priced $5 to $10.99 still account for more than half of the nearly $8 billion off-premise market, but the trend of slowing sales is clear.

The notable exception to this trend is E. & J. Gallo Winery’s Barefoot brand, which is number one in U.S. off-premise sales, according to IRI. Barefoot’s sales totaled $622 million in 52-weeks through June and enjoyed a 7% sales volume increase during that period despite its $5.64 average price per 750ml bottle decreasing by almost a dime.

Growers seek answers
It’s a challenging—or perhaps transformative—time for the interior grapegrowing regions of the state, where farmers are pulling vines in favor of planting highly profitable nut trees (provided they have the water to support them).

At the recent summer conference of the California Association of Winegrape Growers, the challenges posed by changing international market and domestic demand were discussed in detail.

“Right now there’s a lack of leadership in the wine industry. I think it’s that simple,” said Rob McMillan, executive vice president and founder of Silicon Valley Bank’s wine division and one of the speakers on a panel about building the market for California wines. “There’s local, regional focus, but the California brand needs to be built up.…No one is jumping up to say they can do that.”

McMillan added he’d prefer to see someone take a leadership role—and even make a mistake while trying to change the situation—than see widespread apathy start to creep throughout the wine industry.

Joining McMillan was Amy Hoopes, executive vice president and chief marketing officer for Wente Family Estates in Livermore, Calif. She said that the California brand still has tremendous impact in the United States and across the world as an assurance of quality, consistency and the “yum” factor.

Hoopes said that when she travels on sales trips through China, the California brand could have more resonance than the name of the winery. She also noted the success of the Wagner Family of Wine and their Meiomi brand in taking what had been a regional brand and turning it into a $315 million California powerhouse. She said the key will be to “simplify to amplify” the state’s wine brand.

McMillan said the market for higher end wine will continue to stay strong, and one can see California’s largest wine companies making several acquisitions of land and wineries in the North Coast and Pacific Northwest. He identified Mendocino County as one area that should see higher demand because of its good grapes and good growers and added it’s no mistake that Gallo purchased the old Asti winery in Sonoma County from Treasury Wine Estates—likely for its vineyards and proximity to Mendocino County.

Selling wine for less than $9 is not a good place to be, he said. The dollar is likely to continue getting stronger, and McMillan said it’s only a matter of time before it’s at par with the euro. That will continue to strengthen imports, giving consumers even more diverse options at lower price points. “We need to train our younger consumers about the value and consistency of great California wines, no matter the price point.”

Market insights
Earlier in the conference, John Gillespie of the Wine Market Council provided some insights about the overall U.S. wine market that totaled 302 million cases in 2014 and has continued to grow for more than two decades. That growth is starting to lag. “You can see year on year gains have been getting smaller and smaller,” he said.

In 2014, 33 million “high-frequency” wine drinkers accounted for 80% of all wine sales. Gillespie noted it’s somewhat concerning to see fewer “occasional” wine drinkers leading in to the high frequency category. He said while he doesn’t have any studies on this shift, he expects the multitude of options in today’s market from craft beer and spirits to cider, is behind the change.

Younger consumers, possibly rejecting what their parents drank, tend to be less inclined to purchase California wines and instead are opting for those from the Northwest, New York and imports.

Gillespie pointed out that the dry, unfortified wines of Portugal have done exceptionally well in recent years in driving up sales while also building a reputation for quality at value prices. He said this is from the nation’s wine producers overhauling their winemaking and marketing efforts as well as trends here in the United States.

By volume, California wine still dominates, but the success of Portuguese wine is a trend that can’t be ignored. High-frequency wine buyers—especially men—are constantly looking out for what’s hot, what’s new and what’s different. Right now that’s Portugal, he said.

The hype also comes from the wine trade that looks for less known varieties, regions and wines so that they can charge a double or triple retail markup on wine lists without the consumer realizing it. Consumers drink those wines at restaurants and then seek them out at retail outlets. “If you want to blame someone, find a sommelier,” Gillespie said.

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