International Journal of Wine
Marketing
Editor: Michael Howley
ISSN 0954-7541
Volume 16
Number 2
2004
Abstracts and Keywords _____________________________________2
Editorial __________________________________________________3
Globalization in the Wine Industry:
Implications for Export Service Providers
Richard M. Castaldi, Murray Silverman and Sanjit Sengupta _________5
A Tale of Two Regions: Similarities, Differences and Trends
in the French and Californian Wine Industries
Susan Cholette ____________________________________________23
Effects of the Dietary Guidelines Label Statement on Wine
Purchase Intentions in Young Adults
Linda Nowak, Philip McGough and Thomas Atkin ________________48
Creating Value in the New Zealand Wine Industry
Mark M.J. Wilson and Robert W. Goddard ______________________61
A Comparative Study of Wine Auction Prices: Mouton Rothschild
Premier Cru Classé
Jan Bentzen and Valdemar Smith ______________________________73
Volume 16 Number 2 2004
1
A Tale of
Two Wine
Regions
A Tale of Two Wine Regions
Similarities, Differences and Trends in the French and
Californian Wine Industries
by Susan Cholette, Assistant Professor, Department of Decision Sciences,
College of Business, San Francisco State University
Introduction
France is the premier1 provider and consumer of wine in Europe. California
is the dominant wine producer and consumer within the United States. This
analysis compares these two winemaking giants from a business perspective, using a veritable library of data and information from journal, trade and
popular press articles, as well as field interviews with experts. While many
French and some Californians may question the grouping, it will be shown
why a side by side comparison is pertinent and may provide insights for producers and business people on both sides of the Atlantic.
Aspects of the production of grapes and wine are presented in summary for the regions. The total acreage, volume and revenues from grapes
and wine are studied, as are the producers themselves and the standard varietals. Neither California nor France has uniform production across their areas, so supply characteristics are explored by sub-region to capture the
nuances of distinct wine centers. Lastly, wine’s export value and overall
economic contribution to the region is measured.
Following the summary of supply, the demand for wine within France
and the United States is explored with different metrics, from national consumption to per-capita rates. Wine prices span a famously wide range, thus
consumers are segmented and analyzed in further detail. Further discussion
of price points, relationships between market niches and the origin of wine
consumed are also presented. When appropriate and supported with data,
Californian demand is differentiated from that of the US as a whole.
Plentiful supply and strong demand alone does not a market make.
Wine is heavily regulated in both regions, albeit in different ways. A contrast between the US and French restrictions on distribution and production
shows the strong effect that these laws have had on both wine industries.
With the current state of the wine industry examined, the next step is
to make predictions for the sector’s future. Several anticipated developments for both regions and to the global wine sector as a whole are presented, along with the potential ramifications to French and Californian
producers. Suggestions on how to anticipate and strategically plan for these
changes are presented in conclusion.
24
International Journal of Wine Marketing
California and France Supply Characteristics
France and California have very different histories as producers of wine.
France has produced wine since Roman times and has been famous for the
quality of her vintages ever since. Started primarily by French and Italian immigrants, California’s winemaking tradition is only a few generations old. Its
reputation for producing fine wine is even more recent, when some Napa
Valley wines won gold medals at a 1976 competition in Paris, a victory unexpected by the rest of the world, including many Californians. Yet a comparison of their supply characteristics yields some intriguing similarities.
A Tale of
Two Wine
Regions
Acreage
Nearly all (46) of the states in the US have commercial wineries, but California dominates domestic production (Robinson, 1999). California’s wine
grape acreage has almost doubled in the last 10 years, standing at 486k acres
(197 kHa2) in 2002 (Wine Institute, 2003). California makes up most of the
US wine acreage: only 905k acres (366 kHa) were devoted in 1999 to producing table grapes, raisins and wine (Wine Institute, 2003). Furthermore,
90% of the nation’s grapes come from California, where vineyard revenues
amount to $2.6 billion (Murphy, 2003). If California were a separate nation,
it would rank eleventh by vineyard area.
Table I: Supply: Comparison between France and California
France
California
2.226 million acres
0.431 million acres
(917 kHa)
(174 kHa)
Predominant
White
White
Varietals
1. Ugni Blanc (Cognac)
1.
Vineyard Area
2. Chardonnay
Chardonnay
-103k acres
3. Semillon
(Ranked by Popularity)
Red
Red
1. Carignan
1.
3.
Merlot
4. Cinsaut
Cabernet Savignon
-74k acres
2. Grenache
2.
Merlot
– 51k acres
3. Zinfandel – 50k acres
5. Cabernet Savignon
Volume
6.1 billion liters
1.8 billion liters
World Rank by Volume
2
4
# Wineries
More than 25,000
More than 850
# Employed by Wine
500,000
145,000
Industry
Source: Wine Institute, 2003
Volume 16 Number 2 2004
25
A Tale of
Two Wine
Regions
California grows 38 red and 23 white varietals with a majority (59%)
of the acreage dedicated to reds. As shown in Table I, Chardonnay dominates the whites, at 103k acres (42 kHa), and Cabernet Sauvignon, Merlot,
and Zinfandel are the three red giants. These top four grapes comprise 57%
of total state acreage, and of them only Zinfandel is not French. The varietal
mix has changed over the years as vineyards are replanted with more popular, profitable crops. Not all wineries are associated with vineyards but most
of the major wine producers own or have tight control of their grape supplies.
Total acreage devoted to both wine and table grapes in France is
2,258k acres (914 kHa), which gives France the second largest viticultural
area, surpassed only by Spain (Wine Institute, 2003). Unlike California,
France has reduced its vineyards over the past decade by 3% and some regions such as Languedoc have decreased acreage by 20% to avoid overproduction, especially of lower quality grapes (AGRESTE, 2002). Viticulture is a fragmented sector in France with most of the grapes sold and then
remarketed through hundreds of French cooperatives, coming to market
through a complex process (Echikson, et al., 2001).
Reds dominate France’s production, and Ugni Blanc, used for Cognac, is the dominant white. In this land of vin rouge, no white grape
achieves the same popularity as their red brethren, but Chardonnay is the
second most common. As in California, Chardonnay, Merlot and Cabernet
are literally gaining ground (Robinson, 1999). The French are also converting many vineyards to better grapes, such as replacing the ever-present
Carignan with Syrah (AGRESTE, 2002).
Production by Volume and Revenue
France is the second largest producer by volume (6.1 billion liters per year)
in the world, surpassed only by Italy (Wine Institute, 2003). These nine billion bottles are produced with the aid of 200,000 farmers and an additional
300,000 workers, comprising 30% of national agricultural employment
(FEVS, 2002). France is the number one producer of wine by revenue at $6.5
billion3 (Echikson, et al., 2001). The United States is the fourth largest producer, at just under two billion liters. As California produces over 90% of all
US wine, the state still surpasses fifth place Argentina in worldwide volume
(Wine Institute, 2003). California’s production retailed at $14 billion4 in
2002 and directly employs 145,000 people statewide.5
Producers’ Characteristics
Over half the nation’s 1800 commercial wineries are in California. Table II
shows that more than a quarter of Californian wineries are found in Napa.
Yet most US wine is produced by a few suppliers. Gallo alone accounts for
over 25% of national production, and the top five winemakers account for
two-thirds of the domestic wine market (Silverman, Gilinsky, et al., 2002).
26
International Journal of Wine Marketing
Most of the big producers’ grapes are grown in the Central Valley. The District of Fresno/Madera/Tulare has in total 25 wineries, yet produced over one
million tons (33% of California’s wine-grape harvest) in 2002, whereas
Napa produced 130K tons of grapes, only 4.2% of the harvest (Wine Institute, 2003).
A Tale of
Two Wine
Regions
Table II: California Wineries by County
Napa
232
Sonoma
171
San Luis Obispo
63
Mendocino
41
8 counties have more than 20 wineries
8 counties have 10-20
28 counties have fewer than 10
10 counties have no wineries
Source: Wine Institute, 2003
Taking count of French winemakers would be difficult if not impossible. Bordeaux alone has over 20,000 producers (Echikson, et al., 2001). Only
one, the world’s ten largest wine companies, Castel Frères, is French. Even in
Champagne, where the market is dominated by big houses that account for
65% of domestic champagne sales and 90% of champagne exports, over
4,000 different champagne makers exist (Carreyrou, 2003).
While Bordeaux and Napa may come to mind when thinking of French
and Californian wines respectively, this is misleading from a volumetric perspective. Just as California has the Central Valley for high-volume production of grapes of middling distinction, much of France’s wine is produced in
Languedoc-Roissillon: one third of the nation’s total or 9% of the world’s
output (Echikson, et al., 2001). Table III shows that the Herault is the largest
producer by volume of wine, with only 12% rated AOC quality.
Table III: 2002 Production of Wine in France, Shown for Top 14 Departments
Million Liters (or 1000 hl)
Department
All Wine
AOC
% AOC
Rank by
Rank
Volume
(of Top 14)
by %AOC
Herault
6570
800
12%
1
12
Languedoc
Volume 16 Number 2 2004
27
Gironde
6050
5886
97%
2
2
4833
1060
22%
3
11
4555
0
0%
4
4377
0
0%
5
3650
913
25%
6
10
Vaucluse
2509
1836
73%
7
6
Marne
1705
1705
100%
8
1
1355
702
52%
9
9
Var
1350
940
70%
10
7
Rhone
1284
1240
97%
11
3
Maine-et-
1157
935
81%
12
4
1140
760
67%
13
8
925
725
78%
14
5
Bordeaux
A Tale of
Two Wine
Regions
Aude
Languedoc
CharenteMaritime
Cognac
Charente
Cognac
Gard
Languedoc
Champagne
PyreneesOrientales
Languedoc
Loire
Loire Atlantic
Drome
Total: 14
Departments
41460
17502
42%
Total France
52763
24338
46%
79%
72%
% of Total
from
the 14
Departments
Source: AGRESTE, 2002
Exports and Importance of Wine in the Economy
More than a source of state pride and identity, wine is economically important to California. The premiere agricultural product by retail value,6 wine
contributes $33 billion to California’s economy, both through direct expenditures and through secondary sources like wine tourism,7 resulting in an additional $1.2 billion annually within California (Wine Institute, 2003).
Exports represent an important market for Californian producers. Accord-
28
International Journal of Wine Marketing
ing to the Wine Institute, US wine exports, 95% which are Californian, totaled $548 million in 2002. Still, perspective should be maintained:
California is the world’s fifth largest economy, on par with France, with a
2002 gross state product of $1.3 trillion and exports of $120 billion, half of
which are computers and electronics (LAO, 2002). Thus, wine directly or indirectly contributes only 2.5% to the state’s GDP.
A Tale of
Two Wine
Regions
Wine is the second most valuable French export after the Airbus (Friedrich, 2003). Overall, France’s wine and spirits exports were valued at 7 billion E, of which the 550 supplies that comprise the FEVS represent 85% of
the volume. According to AGRESTE, 30% of all production is earmarked for
export. Wines and spirits represent a 6.7 billion E trade surplus, a third of
France’s total (FEVS, 2002).
French, American and Californian Demand Patterns
France takes first place in total wine consumption, at 3.6 billion liters a year
(OIV, 2001). On a per-capita basis, Italy bumps France to second8 place. Table IV shows that with France’s population of 59.3 million, per-capita annual
consumption averages 60 liters of wine each, or 80 750ml bottles. Per-capita
consumption is not adjusted by age, so a typical household of two adults and
two children drinks 6.2 bottles per week. Impressive as these figures are, the
OIV shows that France’s wine consumption has declined 6% since 1998.
Table IV: Consumption of Top 7 States by Share of US Wine Market
Total US
Population-
% of US
Rank by
Share of US
Per Capita
Rank by
Rank by
Millions
Population
Population
Wine Market
Consumption
Share of US
Per Capita
(liters/year)
Market
Consumption
281.4
7.6
CA
33.8
12
1
19%
12.1
1
3
NY
19
7
3
8%
8.8
2
5
FL
16
6
4
7%
9.2
3
4
NJ
8.4
3
9
5%
12.5
6
2
IL
12.4
4
5
5%
8.4
5
6
TX
20.8
7
2
5%
5.0
4
7
MA
6.3
2
13
4%
13.3
7
1
Top 7 States’ Share
France
41%
53%
59.3
60.8
Sources:
Population figures from 2000 census data from (US Census, 2002)
Percentage of domestic wine market data from (Swatzberg, 2000)
France data, total US consumption (Wine Institute, 2003)
Volume 16 Number 2 2004
29
Furthermore, per-capita consumption 50 years ago was double that of today,
at 120 liters annually (Echikson, et al., 2001).
A Tale of
Two Wine
Regions
While the US is third in total overall wine consumption, at 2.1 billion liters, the population is almost 300 million. The average American drinks 7.6
liters of wine a year, placing the US 34th in per-capital consumption (Wine
Institute, 2003). Table IV shows California accounts for 19% of the national
wine market. Thus, an average Californian consumes about 12 liters/yr.
Measured against the Wine Institute’s data, California would take 24th place,
behind Sweden, and greatly lag France.
Although Californians consume less wine than most Western Europeans, their consumption pattern is dissimilar to that of most other Americans.
Texas is the next most populous state, but Texans purchase only 5% of the
wine sold nationally; Texans drink an average of five liters/yr, just below
40th-ranked Azerbaijan. California has the highest per-capita consumption
of the five most populous states, though some smaller states like New Jersey
and Massachusetts average greater consumption.
Further analysis of the US wine market shows 10% of adults make almost 90% of wine purchases. Consumption is increasing, but this trend is attributable to existing wine drinkers pouring more or costlier bottles, rather
than to the younger generation pulling out the corkscrew (Himmelstein,
2002). Table V shows many Americans are non-drinkers, and the most
populous segment consumes wine only on special occasions.
Table V: Characterization and Prevalence of the Types of Wine Consumers
in the US
Type
Non-drinkers
Description
Between 40-45% of American
% of US
% of
population
“Regulars”
42.5%
adults do not consume alcohol of
any kind
Occasional
Adults who drink wine for celebra-
drinkers
tions, but if they drink regularly,
46%
choose beer or liquor
Connoisseurs
Knowledgeable about wine, imbibe
0.6%
5%
5.2%
45%
often, comfortable with purchasing
expensive wines
Aspirants
Have mastered wine basics but
would like to learn more. Willing to
try new brands and varietals
30
International Journal of Wine Marketing
Newcomers
Enjoy wine, but not yet comfortable
4.0%
35%
with experimenting. Tend to stick to
lower price points and with known
brands
Simple Wine
Everyday drinkers who take little in-
Drinkers
terest in learning more about wine.
1.7%
15%
A Tale of
Two Wine
Regions
Predominantly elders from traditional wine-drinking countries
Source: Moulton, et al, 2001
Marketing experts have debunked the conventional wisdom that consumers progress through all price points (Miller, 2001). Likewise, not all
newcomers become aspirants, or aspirants become connoisseurs. The primary challenge and greatest revenue potential is convincing occasional
drinkers to make wine part of their daily live. Beer remains the predominant
alcoholic beverage of choice for Americans, with per-capita consumption at
85 liters/year (Himmelstein, 2002).
While the breakdown of French consumption is not readily available,
one expects fewer teetotalers and occasional drinkers. “Simple wine drinkers” may be more numerous, as many elders drink the local vin du table. The
decreasing French production of ordinary table wines should not result in
shortages as their primary consumer base will dwindle over time. Industry
experts worry that many French, especially the younger generation, are
switching to other beverages, such as beer (Carreyrou, 2003).
Quality and Origin of Wine Consumed
While consumption has not increased by volume9 in the US, consumers are
purchasing more expensive wine than in years past. Adjusting nominal
prices to account for inflation, Table VI shows that average wine prices in the
last five years have remained relatively constant, at around $7 per 750ml bottle. However, this represents a significant increase over the $5.94-$6.30
range (in 2002 net present value dollars) that characterizes the era of 19831995, which in turn represents an era of consuming more expensive wine
than the prior decade.
Table VI: Gentrification of US Wine Consumption: Inflation-Adjusted Prices
Gallons sold
Revenue
Nominal
Inflation
Net Present
(millions)
(billions $)
value per
modifier
Value (2002
750ml
dollars)
1975
368
$3.30
$1.78
225.95%
$5.79
1976
376
$3.60
$1.90
210.82%
$5.90
1977
401
$4.00
$1.98
191.30%
$5.76
Volume 16 Number 2 2004
31
A Tale of
Two Wine
Regions
1978
435
$4.60
$2.10
167.21%
$5.60
1979
444
$5.40
$2.41
135.85%
$5.68
1980
480
$6.20
$2.56
109.62%
$5.37
1981
506
$6.90
$2.70
92.45%
$5.20
1982
514
$7.30
$2.81
85.35%
$5.22
1983
528
$9.10
$3.42
78.58%
$6.10
1984
555
$9.70
$3.46
71.79%
$5.95
1985
580
$10.80
$3.69
65.51%
$6.11
1986
587
$11.40
$3.85
63.71%
$6.30
1987
581
$11.20
$3.82
56.76%
$5.99
1988
551
$11.00
$3.96
50.12%
$5.94
1989
524
$11.30
$4.27
43.46%
$6.13
1990
509
$11.70
$4.55
35.20%
$6.16
1991
466
$10.90
$4.63
31.18%
$6.08
1992
476
$11.40
$4.75
27.48%
$6.05
1993
449
$11.00
$4.85
24.07%
$6.02
1994
459
$11.50
$4.96
20.84%
$6.00
1995
464
$12.20
$5.21
17.85%
$6.14
1996
500
$14.30
$5.67
14.06%
$6.46
1997
520
$16.10
$6.14
12.15%
$6.88
1998
526
$17.00
$6.40
10.47%
$7.07
1999
551
$18.10
$6.51
7.49%
$7.00
2000
558
$19.00
$6.76
3.97%
$7.01
2001
561
$19.80
$6.99
2.38%
$7.16
2002
595
$21.10
$7.03
0.00%
$7.03
Source:
Gallons sold, revenues: Wine Institute, 2003
Cumulative inflation from December-December per www.inflationdata.com
With 25% of the market, chardonnay dominates, but red wine sales
are increasing and are driving the market. This trend is partially attributable
to the 60 Minutes segment on the “French Paradox,” the first wellpublicized story on the potential health benefits of red wine. The quality of
the wines consumed in France has also improved. Vins du Table, the lowest
32
International Journal of Wine Marketing
quality category, represent only about 10% of current sales, as opposed to
25% twenty years ago (AGRESTE, 2002).
From where do Americans get their wine? Wine Institute data shows
that in a typical year (1998) California’s wine industry generated $12.3 billion in US retail sales out of the $17.0 billion10 spent on total domestic and
imported wine products. Californian wine accounts for over 70% of the US
market. US imports totaled $2.2 billion in 1999, 47% from France11 (Wine
Institute, 2002). Therefore, the remainder of the domestic market was approximately $2.5 billion. As the next largest wine-producing states, New
York and Washington, each have under $1 billion in sales (Robinson, 1999),
France was the second largest provider, by revenue, of wines consumed in
the US in 1999.
A Tale of
Two Wine
Regions
French consumers do not reciprocate, however, France imports very
little Californian wine, purchasing a mere $12 million or 2% of US wine exports. Traditionally, French consumption patterns have been regionally oriented with loyalty to local wines. It can be difficult to find a bottle of
Burgundy in Bordeaux.
Regulations: Distribution and Production
The American system of complex regulations and taxation is a legacy of a
colorful past. While the 21st amendment repealed Prohibition and allowed
Americans to consume alcohol again, it could only be ratified by allowing
states to control distribution. Thus some states have tight restrictions. The
state of Pennsylvania has a monopoly on the distribution and retail sale of alcohol (Everett, 2001). Even New York and New Jersey, states with relatively
high wine consumption, have counties that remain dry, at least with respect
to the sale of alcohol. Residents who consume wine purchased elsewhere
need not fear legal prosecution.
Alcoholic beverages are the most highly taxed consumer product in
the US (Swartzberg & Solomon, 2000). Wholesalers are responsible for collecting the excise taxes owed to the federal states and local governments. Excise taxes are separate from sales taxes and vary by state: from 3.4% in North
Carolina to 10% in Florida (Cahill, 2001).
The most notorious of US regulations is the three-tiered distribution
system. Alcohol must pass from a supplier through a wholesaler to a retailer
before reaching the end consumer. Each tier must be a separate entity. Sales
to each tier (and taxes collected) are presented in summary in Table VII, although taxes and mark-ups are not uniform between states.
Volume 16 Number 2 2004
33
Table VII: US Wine Sales by Tier
A Tale of
Two Wine
Regions
Tier
1. Supplier
$ billion
6.4
2. Wholesaler
10.1
3. Retailer
16.2
Tax-$billion
0.6 excise taxes
Sales with
Markup from
taxes $billion
previous tier
7
10.1
1.2 sales taxes
17.4
44%
72%
149% from
supplier
Source: Swartzberg, et al., 2000
Further layers may exist, such as importers who place foreign wines to
US distributors. As each layer imposes a substantial mark-up, consumers
typically pay three times what suppliers receive as revenues. California has
fewer restrictions and is the only state where retailers can have a wholesaler
license (Everett, 2001). These regulatory and tax disparities create price differentials between states. For example, Charles Shaw wines retail for $3.89
in Ohio as a result of Ohio’s excise taxes, distribution costs, and a statemandated mark-up of 135% (Melby & Hall, 2003). Hence, Ohioans cannot
call it by its Californian nickname, “Two-Buck Chuck.”
Aside from lowering demand with high prices, these regulations have
a negative effect on many producers. As a result of consolidation, five
wholesalers serve 33% of the national market (Swartzberg & Solomon,
2000). Wholesalers’ profits come from mark-ups on products they are able
to sell quickly, and wine’s turnover is notoriously slow (2.4 turns/year),
compared to the churn generated by liquor (50 turns/year) and beer (70
turns/year). Therefore, wholesalers are hesitant to represent products that
are not proven bestsellers. Additionally, wineries cannot ship wine to most
consumers nationwide, as the majority of states prohibit direct shipments,
and in several states this offense is classified as a felony (Swartzberg &
Solomon, 2000). Alcohol is the most strictly regulated commodity in the
US, and distributors must take physical possession of stock; they cannot do
electronic transfers.12 Not surprisingly, there is significant backlash against
this system and attempts to bypass it, both legal and illegal.
French distribution is much less regulated in comparison, and French
taxes on wine are at the other extreme of the spectrum, as many Britons
crossing back over the Channel with cases in their trunk will attest. Indeed,
some of the French wine industry, at least in grape production, has historically benefited from EU subsidies. France tends to use taxes more as a punitive measure against non-traditional alcohols, such as the proposed 2 e/liter
tax upon imported high-alcohol beer.
34
International Journal of Wine Marketing
Production Controls
France is hardly free of regulation, but their laws are concerned more with
production than distribution and sales. France strictly controls how wines are
categorized by quality. Table VIII shows the classification and volumes for
each tier.
A Tale of
Two Wine
Regions
Table VIII: 2002 Harvests for Wine Production, from Highest to Lowest Quality
Category
Description
AOC
Status granted to wines produced
Volume, hls
% of Total
24338
46
451
1
8673
16
13374
25
5927
11
only in certain areas with specific
grapes by strict rules
VDQS
Wines with character, but not recognized as worthy of AOC status…yet.
Less control on yields and alcohol
Vins-cognac
Wines used to produce cognac, not
AOC rated
Vins de Pays
Designated from a specific area, but
regulations are relaxed on crop yields
and grape varieties permitted
Autre vins,
Includes vin de connsumation cou-
Musts, Juices
rante, also known as vin ordinnaire
or vin du table. Origin need not be
specified at all
Total
52763
Sources: AGRESTE, 2002 (Data) Williams, 1995 (Descriptions)
Nearly half of French production is dedicated to the 450 different appellations contrôlées (AOC) wines. AOCs were formally instituted in 1937,
but are based on tradition hundreds of years older (Friedrich, 2003). A region
cannot easily change style, as the permissible varietals are set by AOC rules,
as are method of production and crop yields (Essik, 2003). Wine in Bordeaux
or Burgundy can be labeled as mise en bouteille au château (or Domaine), if
additional conditions are met.
Although these rules have helped enforce quality and consumer confidence, resistance exists. If demand for a particular wine changes, supply is
less mobile (Rachman, 1999). The advocacy group, Vignerons dans nos Appellations, claims mediocre wines can be designated as AOC and better
wines excluded (Friedrich, 2003). These winemakers are lobbying for a category “Vins de Cépage de France,” allowing designation of vintage and varietal for wines grown outside approved AOC methods (Essik, 2003).
Volume 16 Number 2 2004
35
A Tale of
Two Wine
Regions
The US is not without production regulations. In the 1970s the BATF
(Bureau of Alcohol, Tobacco, and Firearms) began designating AVAs,
American Vineyard Appellations (Wine Institute, 2003). These 130+ AVAs
range in size from that of the multi-state Ohio River Valley to the smallest,
Cole Ranch, a property in Mendocino County of a mere 150 acres. Ones that
may be most familiar include Napa Valley, Sonoma Coast, and Anderson
Valley. At least 85% of grapes must originate from the AVA to be allowed
the designation, but this rule is lax compared to the French.
Wines cannot be labeled as “Estate Bottled” unless the following conditions hold: the grapes were grown on land owned or controlled by the winery, and the winery processed and bottled the wine, with the wine at no time
having left the premises (Wine Institute, 2003). A bottle can be labeled as a
varietal if at least 75% by volume is the primary varietal with no restriction
or no requirement to identify what comprises the remainder. California winemakers blending a high quality wine that would not meet this specification can submit their opus to the Meritage Society to apply for the right to use
“Meritage” on the label, yet other modifiers, like “Reserve” mean little
(Shelton, 2001). Winemakers monitor alcohol concentration to make sure
that it is not too high and thus liable for additional taxes. But the percentage
limits for particular AVAs are not as strictly mandated as in France.
Both countries control what can appear on the front and back of a label, and many legal battles and legislative campaigns have been fought over
the contents of these precious square inches. Napa Valley Vintners are challenging Fred Franzia, whose company, Bronco, hauls Central Valley grapes
to Napa to be bottled, thus justifying placement of “Napa” on the back label
of Charles Shaw (Moran, 2003). Mr Franzia has previously won the right to
continue labeling one of his wines from the Central Valley as “Napa Ridge.”
Predictions for the French and Californian Wine Industries
Trend 1: Cyclical and Growing Demand
The wine industry is subject to the same boom/bust cycle common in many
other industries. Given the several year lag that occurs between planting
vines and increasing or shifting production to more popular varietals, it
should not be surprising that the supply of wine grapes is not always in sync
with their demand. Californian and French grape producers are now caught
in the middle of a worldwide grape glut (Murphy, 2003). Coupled with an
economic recession, the mood is darker than it was back in 1999 and 2000.
Many13 predict it will be another one to two years before a recovery is noticeable.
While top quality grapes and wine will always have a market, even the
winemakers in Bordeaux are suffering from lower prices (Financial Review,
2003). Most Napa and Sonoma growers should be able to ride out the glut,
but many Central Valley farmers face foreclosures, and an estimated 70,000
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International Journal of Wine Marketing
acres there have been ploughed under (Murphy, 2003). In France, the equivalent of 13 million bottles of Beaujolais wine was distilled into industrial alcohol (Friedrich, 2003). Recently, some vineyards in regions like LanguedocRoissillon have been converted to sunflowers and other crops (AGRESTE,
2002).
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What hurts suppliers can help consumers, who benefit from the glut by
buying more wine as prices drop. The most famous of the bargain wines is
Charles Shaw, which sells four $1.99 varietals through the grocery chain
Trader Joe’s and is responsible for 15% of California’s retail wine sales in
2003 (Economist, 2003). Other wine retailers like Safeway and Beverages
and MoreTM have followed suit with wines in this new “super value” segment. Many connoisseurs deride these as “plonk” and complain that they undercut before offerings in the $3-7 market. Yet the upside is that ultra-cheap
offerings may boost the wine industry in the long run, increasing overall demand by luring young adults away from beer and providing bargains that motivate occasional drinkers to purchase more wine (Economist, 2003). Bronco
offers testimonials that their brand is converting people to serving wine with
dinner regularly (Moran, 2003). Whether these converts continue to drink
wine after the glut abates and prices presumably14 rise remains to be seen. For
now the excess is being consumed, and Californians are enjoying a phenomenon known formerly only to Europeans: wine as cheap as bottled water.
Outside of economic and viticultural cycles, the wine industry is ripe
to expand. Further deregulation and continued reports of the therapeutic
benefits of wine should provide the impetus to increase consumption in the
US, especially if these benefits are promoted by the wine industry. However,
many countries like Chile, Argentina and South Africa are expanding their
vineyards and reach, and so supplies will increase along with demand.
Trend 2: Importance of Market Segmentation
The stereotype that winemakers catering to the luxury market avoid selling
accessible wines for mass consumption is no longer correct nor the favored
business model. Silverman, Castaldi et al. (2002) divide the US wine market
as shown in Table IX, and many suppliers find it advantageous to sell to different categories. This practice traces its origins to France, with the Bordeaux
tradition of second labels.
Table IX: US Wine Market by Segment
Market
Retail Price:
Percent Total
Percent Total
Sales Growth
Segment
per 750ml
Volume
Revenue
2000 vs. 1999
Jug Wines
Up to $3
44%
17%
-4%
Popular
$3-$7
33%
31%
+3%
Premium
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Fighting Varie-
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16% for both
27% for both
tals/Mid-
$7-$10
categories
categories
Premiums
combined
combined
Super-Premium
$10-$14
Luxury
Over $15
Sources: Silverman, Castaldi
+22%
+23%
7%
et al.,
25%
+18%
2002 and Hay, 2001
Historically, Californian wineries have repositioned themselves to
meet market needs.15 Currently, producers may target many or all segments.
Mondavi has brands at several price points, from high-end Opus One, followed by Mondavi Reserve, Mondavi Coastal and lastly, Woodbridge
(Grubbs, 2001). The king of jug wine, Gallo, has entered the luxury segment
through both acquisition and an active re-branding campaign. Even relatively small producers engage in segmentation strategies: Ravenswood
prices their Vintner’s Blend Zinfandel at $7/bottle and several single vineyard designed Zinfandels at around $50/bottle (Himelstein, 2002).
People who buy a bottle of Woodbridge cabernet do not buy it as a
substitute for Opus One,16 so producers can introduce a new brand to a niche
without cannibalizing existing shares of other markets. Different theories
exist on the synergy between segments. Ravenswood hopes to convince
people to trade up from their basic $7 offering to their more expensive labels
(Himelstein, 2002). Yet Mondavi has purposely de-emphasized their association with Woodbridge to avoid consumer confusion and the perception of
diluted quality (Grubbs, 2001).
Pricing is a strategic decision for producers. In addition to giving the
wineries sufficient margin, the price must be attractive for distributors and
retailers, providing both a reasonable profit per bottle and satisfactory rate of
turnover on inventory. Label design, use of appellation and varietal serve as
cues to the consumer: most people expect a Napa Valley Cabernet Sauvignon to retail for more than a generic red table wine or a Central Valley offering. Active campaigns that promote the wine to the trade and end
consumers can create excitement and convey prestige, especially important
should the winery plan to raise prices. Lastly, a winery needs repeat customers and cannot expect to remain in business long by selling $5 wine with a label and price-tag in the super-premium range.
Wines in the higher niches may be less sensitive to downward price
pressures, and in times of higher grape prices, producers can focus on maintaining high standards for their product rather than having to dilute quality to
maintain wines at a certain price-point (Shelton, 2001). But there is a price to
be paid, as customers in the Super-Premium and Luxury segments are more
willing to experiment with competing brands. Customer research on Mon-
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davi’s portfolio (Grubbs, 2001) suggests loyalty is inversely correlated with
the price of wine.
To carry strategic segmentation to an extreme, when some entrepreneurs determined that the best opportunities were in the $4.99 to $6.99 niche,
they created a virtual winery, Barefoot Cellars, expressly for this purpose
(Houlihan, 2001). Wine purists on both sides of the Atlantic may scoff at this
“paint-by-numbers” method of winemaking. Yet these approaches are often
more lucrative than attempting to supply artisan wines.
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Certain segments may not be feasible initially. Wineries without an established reputation or high rankings from critics have difficulty convincing
consumers to pay more than $30 a bottle, or, more directly, getting restaurants, retailers and distributors to stock their bottles. The market most accessible in the latest recession has been the under-$15 price range (Shevory,
2003). Once a customer base and reputation is established, it may be possible
to sell into more expensive segments.
Even if the French do not have the same pattern of segmentation, those
who export wines to the US need to be familiar with these markets, determining which niches are advantageous to target, and develop strategies to compete within them. Producers should consider revenue management and
segmentation in their strategic planning efforts.
Trend 3: Reaching the Consumer: Changing Distribution and Retail
Over 40% of wine is sold through supermarkets and discount retailers in the
US (Echikson, et al., 2001). These venues should continue to gain share at the
expense of the corner liquor store and small boutiques. Retail patterns affect
suppliers, as supermarkets prefer readily-available brands that sell quickly at
a profit, however modest. High gross margins may not be sufficient to justify
stocking an obscure wine that gathers dust on the shelf (Everett, 2001). Conversely, should the wine prove more popular than expected, many small producers cannot guarantee supplies.
As more Americans perceive wine as an accompaniment to food rather
than as the devil’s brew, some US regulations concerning wine are easing.
Several states have repealed their bans against direct shipping. Yet the
three-tiered distribution system is unlikely to be fully dismantled, if only because of the loss of tax revenues. Web-enabled wine sales are not expected to
reach the huge volumes predicted in the internet bubble era. Even the CEO of
New Vine Logistics, a company that enables B2B/B2C wine commerce, predicts that direct shipping could account for at most 10% of the US wine market, and that wineries will not be able to solely rely on internet transactions
instead of marketing through traditional channels. Wine is often an impulse
or last-minute buy, making the supermarket a better venue. A display case is
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often strategically placed next to the meat counter so the shopper buying
salmon on special also remembers to pick up that nearby chardonnay
(Miller, 2001).
While bricks-and-mortar retailers may have little to fear from ecommerce, they also have much to gain. One specialty retailer, Beverages
and MoreTM, offers a website that expands their marketing reach and customer base. Overhead is kept low by sourcing online orders through the existing store distribution network. Orders can be delivered directly or picked
up at a retail store, where there are additional sales opportunities (Boone,
2001).
The shift to supermarket purchases and the high-volume wines
stocked upon their shelves is no longer solely an American phenomenon.
Britons buy over 70% of their wine from supermarkets (Echikson, et al.,
2001), and French consumers are flocking to supermarkets and making
more wine purchases there. Likewise, even the traditional French are exploring the internet as a vehicle for selling or at least marketing their wines
(Essik, 2002).
Trend 4: Shifts in the Export Market
The economic importance of wine exports for both France and California
can be measured by liter. In 1998, France and first place Italy split over half
the world export market between them, with the US in a distant 4th, at 4.2%
(Silverman, Castaldi, et al., 2002). Still, as most of that was Californian
wine, this volume is significant for the state. Both the US and French producers need to actively manage their export strategies to grow, or even maintain, their share. Table X below shows some disturbing trends. Despite
increased production and sales within the US, suppliers have not managed to
make great inroads into the export market, and the overall trade balance was
even more unfavorable in 2002, at 5:1, than it was in 1999, at 4:1. The recent
plunge of the dollar may help to counter this in 2003, but a sound export
strategy should not rely on the need for favorable exchange rates.
Table X: US Imports and Exports between 1999 and 2002, Overall and by Three
Top Exporters to US
All Wine Types, Values in Millions $
2002
40
1999
US Imports
US Imports
Exports
Exports
Change in Exports
Australia
460.8
1.4
204.7
0.9
125%
Italy
781.3
0.7
546.9
1.3
43%
France
935.6
13.3
1054.4
7.3
-11%
International Journal of Wine Marketing
World Totals
2772.4
549.4
2270.6
560.8
22%
Source: Wine Institute, 2002
The implications for the French are even more ominous. In 1990,
France exported 12 billion liters of wine and champagne, representing 30%
of the entire world market for wine. By 2001, that market share had fallen to
just 23% according to Fédération des Exportateurs de Vins et Spiritueux de
France. Non-sparkling wines have been most affected. Between 2001 and
2002, the French wine industry experienced a drop in export volume of 4%,
while Australia’s wine exports grew 30% (Essik, 2003).
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French and Californian winemakers should see Southern hemisphere
producers as the new threat. In particular, Australians export over 40% of
their production (Silverman, Castaldi, et al., 2002). UK consumers, a big
market for both French and Californian producers, have been switching to
Australian wine. Bronco’s Fred Franzia, states that the biggest threat to the
California wine market is Australia (Moran, 2003). Even wineries that may
aspire to sell only in their neighborhood can no longer rely on regional markets remaining isolated and their offerings automatically preferred by local
consumers. They must become proficient exporters, or at least be prepared to
compete with the Southern Hemisphere winemakers to grow and prosper in
the increasingly global wine sector.
Trend 5: International and Domestic Partnerships and Consolidation
The proliferation of new wineries that characterized California in the late 80s
and 90s will not continue. Rather, the trend will be towards consolidation,
and the number of independent wine makers will likely shrink as large firms
buy failed or struggling wineries. Gallo and Bronco have both made recent
acquisitions in Napa.
Franco-Californian cooperation already has its Magnum Opus; over
20 years ago legendary leaders from each wine region, Mondavi and
Mouton-Rothschild, created Opus One. Some recent efforts have yielded
less palatable fruit. While Mondavi has either purchased or partnered with
other wineries in several different countries (Silverman, Gilinsky, et al.,
2002), they had little success with Vichon in the Languedoc. Now that Mondavi has been driven off, the local winemakers face a new invader, the Australians, who plan to create mid-priced offerings and in the process, shock
their traditional neighbors with new production methods (Carreyrou, 2003).
French winemakers have ventured abroad. Several have partnered
with new world wineries, creating joint ventures with local owners with
small production capabilities (AGRESTE, 2002). Though not making as
many headlines or filling pallets by the truckload, this approach lets them
better monitor and control the quality. Californian sparkling wine has a dis-
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tinct Gallic flavor; Domaine Caneros, Domain Chandon, Mumm Cuvee
Napa, Pieper-Sonoma, and Roederer Estate are all owned by French champagne houses.
Purchases of wineries abroad will continue to be an important part of
wine business strategy, providing foreign producers the opportunity to utilize the established distribution channel, existing suppliers and market
knowledge of employees of the acquired company (Silverman, Castaldi, et
al., 2002). For smaller producers, partnering offers similar benefits, with
less capital investment.
Conclusion
California and France have different viticultural histories and currently are
very heterogeneous, with different supply characteristics, consumption patterns and consumer attitudes. Disparate regulations on production and distribution likewise differentiate their respective industries. Yet many of these
differences are slowly eroding, and in the future producers from both regions face many of the same threats and opportunities.
In the next few years US and French producers may expect some relief
as the glut abates. Repurposing of marginal vineyards or low quality grapes
in regions in California’s central valley and Languedoc will decrease downward pressure on grape prices. Currency fluctuations and regional differences in rate of recovery may shift demand temporarily, but in the long term
world demand will grow.
Before counting on the increasing global thirst for wine to drive demand, it must be considered that increasing supplies from other nations will
keep competition strong. Likewise, the savvy producer will not rely on clients’ unwavering devotion to a regional wine style. Traditional product loyalties will continue to evaporate, forcing producers to take the offensive and
market to a global consumer. Changes in wine retailing will further amplify
these effects. With more wine purchases in hypermarkets, producers and
their representatives may have easier access to foreign markets, but also face
increased competition in their home territory. National differences will not
evaporate, but Californians have recently shown an increased thirst for affordable Australian Chardonnay, despite an abundance of the locally produced varietal. Northern hemisphere producers would be unwise to ignore
their rivals from the other half of the world, who are ramping up their production, with plans to capture a larger share of the export market.
Producers will need to not only market globally, but sell to different
segments within each local market. Segmentation effectively allows a supplier to respond to consumer trends quickly, producing more wine in a growing niche by shifting grapes or other resources away from less popular
segments or varietals. Likewise, producers must pay attention to retail
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trends. Gone are the days of “If we bottle it, they will come,” and all but the
most exalted brands must aggressively seek and secure the best venue for
their target customers.
Wineries will continue to consolidate and form joint ventures. These
acquisitions and partnerships can be used to take advantage of market opportunities as well as avoid some of the more stifling regulations of the native
countries. A recent example of a Franco-Californian merger was the acquisition of DeLoach, a bankrupt Sonoma winery, by French wine company Boisset in October, 2003. As the market becomes more international and
production more fluid, some regulations may ultimately be relaxed. There is
increased pressure for change in both France, with respect to AOC restrictions, and in the US, with respect to distribution laws.
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While there will always be a market for artists and artisan quality
wines, the business opportunities are to be found in selectively targeting the
right global markets, price points and method of distribution. By marketing
wine as a healthy part of an everyday lifestyle, occasional drinkers and young
adults can be converted, increasing the consumer base to everyone’s benefit.
With the right application of strategy, analysis and action, both French and
Californian producers will have much to toast to with their best vintages.
Volume 16 Number 2 2004
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Endnotes
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1. Italy is a larger per-volume producer and per-capita consumer, but France
is still the first in terms of revenues and consumption volume. Statistics
aside, one could argue that France is “le premier” in quality.
2. To accommodate European and American readers, land areas are expressed in both English and metric units. Currencies will be expressed in undiscounted dollars or Euros, as appropriate to the country, unless the source
has already performed a dollar conversion. Volumes are left in liters as wine
is sold in metric units, even in the US.
3. The global wine market is valued at $100 billion (Carreyrou, 2003).
4. While California’s production would appear greater than France’s by retail sales, US Retail values are highly inflated because of enormous markups that result from the 3-tiered distribution system, as discussed later in the
analysis. Table VI shows that all suppliers received only $6.4 billion for
sales of wine in 1998 on the US market.
5. Full data available from www.wineinstitute.org/communications/statistics/Sales_02.htm
6. According to LAO, the dairy sector’s valuation is higher, but their comparison is done only with respect to wine-grapes. Winemaking entails a
huge value-add over the cost of the grapes used.
7. California and France both rely on tourism. The California Tourism website (http://visitcalifornia.com/state/tourism) shows the state is the number
one travel destination in the US, resulting in over a $75 billion contribution
to the state economy. Tourism is California’s third largest employer, and
fifth largest contributor to the gross state product. France attracts more tourists than any other country, who spend over $125 billion annually, providing
1.5 million jobs. (Ministère des Affaires Etrangeres, 2003). Both California
and France have large wine tourism industries.
8. According to OIV statistics, Luxembourg would technically be first and
Italy second. This is misleading as Luxembourg serves as a distribution
point to other European countries and is not a large consumer.
9. Purchase and consumption are used interchangeably, with the assumption
that most wine purchased is consumed within that year. While some collectors cellar bottles for years, the vast majority of wines are consumed relatively quickly after purchase, justifying this simplification.
10. US Exports are excluded from these statistics.
11. France’s $1.1 billion share of the US market in 1999 was especially high
thanks to millennium-driven champagne sales. It has since decreased.
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12. Katie Schumacher (CEO of New Vine Logistics) Personal Communication, June 11, 2003.
13. Katie Schumacher (CEO of New Vine Logistics) Personal Communication, June 11, 2003, among others.
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14. As of mid-2003, Wine industry experts currently are debating whether
“super value” prices are sustainable in the long run, and a consensus has not
yet been reached.
15. (Lukacs, 2000) provides a history of American winemaking, which went
through a dark period when many producers sold jug and fortified wines, as
Americans had turned to cocktails in lieu of fine wines.
16. Some wine marketing experts hope that people who use an inexpensive
everyday house wine may buy more expensive bottles for a special event and
stick within the family of brands. But for any given purchase it is unlikely a
buyer would choose between a $7 bottle of Woodridge Merlot and a $75 bottle of Opus One.
Volume 16 Number 2 2004
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Two Wine
Regions
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