industry perspective
WINE / VINEYARD
2 0 0 27 0–1 24 0 0 8
TABLE OF CONTENTS
TABLE OF CONTENTS ........................................................................................................ 1
PARTICIPANTS .................................................................................................................... 2
INTRODUCTION ................................................................................................................... 3
DRIVERS............................................................................................................................... 9
BEST PRACTICES .............................................................................................................. 17
APPENDIX .......................................................................................................................... 19
©Northwest Farm Credit Services 2014
PARTICIPANTS
This Industry Perspective* was prepared by the Northwest FCS Wine/Vineyard Knowledge Team:
Erin Kniveton, Credit Officer /AVP
Dennis Bigness, Relationship Manager/VP
Tricia Chastain, Senior Appraiser
David Denos, Credit Officer
Rod Endow, Branch Manager/VP Risk Management
Trudi Kochendorfer, Senior Insurance Agent
Michael Mejia, Credit Officer
Aimee Pearson, Senior Insurance Agent
Bill Shibley, Regional Vice President, Columbia Basin
Kurt Wittman, Relationship Manager/VP
Pasco, Wash.
Pasco, Wash.
Salem, Ore.
Salem, Ore.
Nampa, Idaho
Sunnyside, Wash.
Pasco, Wash.
Sunnyside, Wash.
Pasco, Wash.
Salem, Ore.
Questions and comments can be directed to the Northwest FCS Knowledge Center:
[email protected]
*Date of publication: December 2014
Disclaimer: The following material is for informational purposes only and cannot be relied on to replace your own judgment or that of the
professionals you work with in assessing the accuracy or relevance of the information to your own operations. Nothing in this material shall
constitute a commitment by Northwest FCS to lend money or extend credit. This information is provided independent of any lending, other
financing or insurance transaction. This material is a compilation of outside sources and the various authors’ opinions. Assumptions have
been made for modeling purposes. Northwest FCS does not represent that any such assumptions will reflect future events. Past industry
trends are not to be considered a guide to future events and actual future events may be materially different from projections.
©Northwest Farm Credit Services 2014
2
INTRODUCTION
Executive Summary
The United States is the largest wine market in terms of dollars. Although Americans do not drink as
much wine per capita as their European counterparts, U.S. wine consumption is at an all-time high.
The U.S. surpassed France to become the world’s largest wine consumer by volume in 2013.
The U.S. generates approximately 8 percent of world wine production, ranking fourth behind France,
Italy and Spain. Wine production in the United States is dominated by California, where approximately
90 percent of all U.S. wine is produced. The Northwest wine industry - concentrated in Washington,
Oregon, and Idaho - has more than 75,000 acres of wine grapes, nearly 1,500 wineries, and
represents approximately 5 percent of U.S. wine production.
The U.S. wine industry has experienced steady growth for the past two decades, driven by increasing
consumption of higher quality, higher priced wines. However, the U.S. wine industry was threatened
during the recession of 2008 and 2009. During that period, consumers cut back on restaurant wine
consumption and traded down on wine purchases, seeking economy over quality.
With the improved economy, wine sales have rebounded. Although on-premise (e.g. restaurant) wine
sales have generally remained flat, consumers have returned to drinking more and higher priced
wines. According to IRI, a Chicago-based market research firm, off-premise sales of domestic wine
grew by 7 percent in 2013. The fastest growing segment was wines priced $20 per bottle and higher;
up 21 percent from 2012.1 Off-premise sales of domestic table wine and domestic sparkling wine grew
at 6 percent for the 12 months ended in October 2014.2
U.S. wineries and vineyards were reluctant or financially unable to invest in infrastructure as the
industry readjusted and recovered from the recession. Despite stronger interest in vineyard
development, new vineyard plantings in the U.S. are not keeping pace with demand growth for wine.
Vineyards in California and the Northwest compete for acreage with high value fruit and nut crops.
Additionally, persistent and severe drought in California continues to hamper growth.
Prospects for the U.S. wine and vineyard industry continue to improve. Sustained growth in wine
sales and consumption will drive growth in vineyard acres. Given limitations in California, vineyard
development is likely to focus in other areas of the nation, including the Northwest. Within the last two
years the Northwest has experienced increased investment by California vineyard and wine
operations. This trend is expected to continue.
Global Perspective
The traditional ‘Old World’ wine growing regions of Europe dominate world wine production.
Essentially tied as the world’s largest wine producers, Spain, Italy, and France each account for
between 15 and 17 percent of global production. Combined, these countries account for nearly half of
global wine production. When including other European Union (EU) countries in the estimate, the
region produces approximately 60 percent of the worldwide total. However, the world’s vineyard
acreage is contracting, led by reductions in Europe. European wine consumption is also declining,
falling an estimated 2.5 percent in 2013, according to the International Organization of Vine and Wine.
1
Wines and Vines. “Domestic Wines Grow 7% in Off-Premise Sales in 2013.” Available URL:
http://www.winesandvines.com/template.cfm?section=widc&widcDomain=siri#content=127455
2
Wines and Vines. “Wine Industry Metrics.” Available URL:
http://www.winesandvines.com/template.cfm?section=widc&widcDomain=siri&widcYYYYMM=201410
©Northwest Farm Credit Services 2014
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Growth in global wine production and consumption is led by ‘New World’ countries. New World wine
production essentially describes all wines produced outside the traditional growing areas of Europe.
For purposes of this discussion, the New World refers to wines produced in the United States,
Argentina, Australia, South Africa, Chile and New Zealand. New World wine output has grown at a
much faster rate than European production, largely due to lower operating costs, fewer regulations,
and a focus on the export market.
The table below provides forecasted world wine statistics for 2013 by the International Organization of
Vine and Wine.
World Wine Industry Statistics 2013**
Country
Italy
Spain
France
U.S.
Argentina
Chile
Australia
South Africa
Germany
Other
Total
Vineyard
Acres
1,858,233
2,527,888
1,962,017
1,008,190
553,516
511,508
390,426
321,237
252,047
8,989,693
18,374,756
Production
(Liters 000)
4,490,000
4,472,900
4,201,600
2,200,000
1,498,400
1,280,000
1,245,600
1,097,200
830,000
6,544,300
27,860,000
Consumption
(Liters 000)
2,179,500
910,000
2,818,100
2,914,500
1,033,700
313,000
528,900
367,600
2,030,000
6,103,400
19,198,700
Per Capita
Consumption
(Liters)
35.45
19.21
42.73
9.21
24.26
18.18
23.76
7.56
25.02
2.69
Source: International Organization of Vine and Wine (OIV), “State of the Vitiviniculture World Market,” May 2014, Census
data. **The available statistics are a forecast of the 2013 and should not be considered final.
U.S. Perspective
The United States is the world’s fourth leading producer of wine, and leads New World wine output,
producing about 8.0 percent of the world’s wine in 2013. Of that, California accounts for approximately
90 percent of U.S. wine production with a crush of 4.2 million tons in 2013. According to the Wine
Institute, California not only accounts for the overwhelming majority of U.S. wine production, the
state’s wineries also control approximately 60 percent of the U.S. wine market (three of every five
bottles sold in the U.S.). California also supplies 90 percent of all exported U.S. wine. Washington, a
distant second to California, produced 210,000 tons of grapes in 2013, while Oregon produced more
than 56,000 tons. Idaho produced approximately 3,000 tons of wine grapes in in 2012, reflecting the
most recent statistics.
The U.S. wine industry lacks a set of comprehensive, consistent statistics. The data outlined in the
table below - retrieved from various sources - provides a summary of the wine industry on the U.S.
West Coast, which comprises the majority of the U.S. industry.
2013 West Coast Wine Industry Statistics
Vineyard Bearing % Non- Production
Yield
State
Acres
Acres Bearing
(Tons) (Per Acre)
Calif.
494,192 469,061
5.0% 4,240,000
8.58
Wash.
50,259
210,000
4.18
Oregon
23,955 21,681
9.5%
56,246
2.59
Idaho
1,250
2,472
1.98
Grape Value
Grape Value Wineries
(Total Value)
(Per Ton) (Number)
$3,200,000,000
$755
4,100
$233,100,000
$1,110
800+
$127,990,000
$2,249
605
*$3,213,600
*$1,300
51
Sources: California: USDA NASS 2014, Wine Institute 2014; Washington: USDA NASS 2014, Great Northwest Wine;
Oregon: Southern Oregon University 2013 Oregon Vineyard and Winery Census Report; Idaho: Idaho Wine Commission via
Email. *Grape value was an estimated average and should not be taken as an exact value.
©Northwest Farm Credit Services 2014
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In 2013 the United States was the world’s largest consumer of wine, drinking 323.8 million cases; a
0.5 percent increase from the previous year.3 According to the Wine Market Council, increased
consumption can be attributed to an increase in core consumers (individuals who drink at least one
glass of wine a week), and by a jump in Millennials (consumers between the age of 21 and 37)
drinking more wine.
Pacific Northwest Perspective
Washington Vineyard Overview
Washington ranks second in the United States in the production of wine grapes. Washington has 13
‘appellations,’ or American Viticultural Areas (AVAs), that cover more than 50,000 planted acres. Most
of the plantings lay east of the Cascade Mountains. Washington’s four primary varietals - Cabernet
Sauvignon, Merlot, Chardonnay and Riesling - account for more than 75 percent of the state’s total
acreage. Approximately 350 wine-grape growers operate in the state, with a majority of the acreage
contracted to large corporate wineries. The majority of vineyards in Washington grow grapes under
contract for Ste. Michele Wine Estates, the state’s dominant winery. The following table shows the
approximate production and average price for Washington wine grapes in 2013.
Red Wines
White Wines
2013 Washington Wine Grape Production by Varietal
Production
Average Price
Variety
(tons)
(per ton)
Riesling
40,200
$796
Chardonnay
40,500
$916
Sauvignon Blanc
5,700
$884
Gewurztraminer
3,300
$757
Semillon
1,000
$1,003
Chenin Blanc
1,300
$773
Pinot Gris
8,000
$802
Viognier
1,900
$961
Other Whites 1/
1,300
$1,069
Production
Average Price
Variety
(tons)
(per ton)
Cabernet Sauvignon
42,600
$1,440
Merlot
36,000
$1,186
Syrah
15,300
$1,292
Cabernet Franc
3,400
$1,485
Malbec
2,000
$1,570
Sangiovese
1,300
$1,258
Grenache 3/
900
$1,889
Petit Verdot 3/
1,200
$1,592
Mourvedre 3/
800
$1,673
Pinot Noir
900
$1,000
Other Reds 2/
2,400
$1,492
Total
210,000
$1,110
Sources: USDA NASS 2014, Washington State Wine State Facts
3
International Organization of Vine and Wine. “The Wine Market: Evolution and Trends.” May 2014. Available URL:
http://www.oiv.int/oiv/files/4%20-%20Statistiques/4%20%201%20Publications%20statistiques/OIV_NoteConjmars2014_%20EN_%20New_data_2.pdf
©Northwest Farm Credit Services 2014
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New plantings have become more site specific during recent years. For instance, Cabernet
Sauvignon, Syrah, and Merlot now are cultivated on warmer sites like Red Mountain, Horse Heaven
Hills and the Mattawa area4. Riesling, Viognier, and to a lesser extent Pinot Gris, have seen increased
plantings in sites better suited to the unique growing needs of those grape varieties. In the past,
plantings were larger and typically one or two varieties were grown. Today, mixed plantings are far
more common.
Cold weather is the major production risk for Washington wine grape growers. The most intense
damage occurs when severe cold winter weather prevails after the grapes have entered dormancy. A
major frost event occurred in February of 1996, severely impacting most growing areas east of the
Cascades. Although that marked the last time that Washington’s wine industry suffered widespread
damage, localized winter damage has vexed certain areas such as in the Walla Walla Valley and
Horse Heaven Hills during the winter of 2010 to 2011. After grape production in 2011 was reduced
due to a freeze in late 2010, Washington recorded a record crop the following season.
Partly due to this history of winter damage, most of the grape vines in Eastern Washington are selfrooted and are not resistant to Phylloxera, a root-eating insect. Phylloxera has not been a major issue
in Washington to date. However, should this pest become established and then spread, it could
precipitate a dramatic change in agricultural practices.
Washington Winery Overview
The Washington wine industry now boasts over 800 wineries. These wineries are concentrated
around large population centers, traditional growing areas, and tourist destinations. During recent
years, the single-largest growth area for Washington wineries has been the Walla Walla Valley.
Washington has gained notoriety for producing high quality wines that are moderately priced. As a
percentage, Washington wines receive more scores of 90 or above from Wine Spectator than any
other region, including France and California. Last year, 44 percent of Washington wines received
high scores compared to 42 percent of French wines, and 28 percent of California wines.
The Washington wine industry is dominated by the Ste. Michelle Wine Estates; a wine holding
company owned by the Altria Group. (Altria purchased the former owner, U.S. Tobacco, in early
2009). Ste. Michelle Wine Estates produced nearly 8 million cases in 2013 under 10 different labels.
The largest brands are 14 Hands, Columbia Crest, and Chateau Ste. Michelle. The 14 Hands and
Columbia Crest brands target the $7 to $14 per bottle range. The Chateau Ste. Michelle brand
produces 2.8 million cases and targets price points between $15 and $40 per bottle.
Ste. Michelle Wine Estates accounts for over 60 percent of Washington’s annual production. Over the
last few years, Ste. Michelle has diversified its holdings by purchasing Erath Vineyards in Oregon and
Stag’s Leap in California’s Napa Valley.
Precept Wines in Seattle is Washington’s second-largest wine producer. Precept owns more than
4,200 acres of vineyard in Washington, Oregon and Idaho and produces more than 1 million cases
annually. Precept also operates 10 tasting rooms and eight production facilities in the Northwest.
Precept sells over 30 brands with a focus on prices between $7 and $15 per bottle.
Constellation is the third-largest wine company in Washington, but is the largest wine company in the
world when all of its operations are taken into account. Constellation’s largest winery in Washington is
Hogue Cellars. In 2008 Constellation downsized its Northwest wine portfolio by selling Columbia
Winery and Covey Run Winery in Washington, and Ste. Chapelle in Idaho to an investor group –
Ascentia Wine Estates.
4
See Appendix for locations of these regions.
©Northwest Farm Credit Services 2014
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In June 2012, Ascentia Wine Estates sold Columbia Winery and Covey Run Winery to E. & J. Gallo
Winery. E. & J. Gallo is the largest family owned winery in the world, and is based in California.
Output from the more traditional family wineries makes up the remaining 20 to 25 percent of
Washington production. Roughly 500 such wineries annually produce approximately 2 million cases of
wine. On average, 3,750 cases are produced per traditional winery. Larger family operations typically
own vineyards, whereas the smaller family-owned wineries purchase most of their grapes.
Oregon Vineyard Overview
Oregon currently has 16 American Viticultural Areas (AVAs), with nearly 24,000 acres of vineyard
planted throughout the state. As a result of brisk development over the past few years, 9.5 percent of
planted vineyard acres are non-bearing5. This compares to about 5 percent in California.
Unlike Washington, most of Oregon’s vineyards are cultivated west of the Cascades. Western
Oregon’s climate favors cooler-season grapes such as Pinot Noir and Pinot Gris. Notably, 58 percent
of Oregon’s grape production is Pinot Noir. Pinot Gris accounts for nearly 18 percent followed by
Chardonnay and Riesling at about 3 to 5 percent each. The remaining acreage is spread among more
than 12 other varietals. Due to its cooler climate, grape yields in Western Oregon are much lower than
those in other western states. The following table shows the approximate production and average
price for Oregon wine grapes in 2013.
2013 Oregon Wine Grape Production by Varietal
Production
Variety
(tons)
Pinot Noir
32,355
Pinot Gris
10,321
Chardonnay
2,828
White Riesling
1,830
Syrah
1,370
Merlot
1,081
Cabernet Sauvignon
1,042
All Other
5,419
Total
56,249
Average Price
(per ton)
$2,651
$1,562
$2,236
$1,507
$2,154
$1,874
$2,124
$2,249
Source: Southern Oregon University 2013 Oregon Vineyard and Winery Census Report
Production risks for the Oregon vineyard industry vary by region. The Willamette Valley’s major
concerns relate to having adequate summer heat and length of growing season to ripen the crop, and
the risk of rains that may come during harvest. Additionally, phylloxera has established itself in the
Willamette Valley, so most new plantings over the last decade have been on phylloxera-resistant root
stock.
The Columbia River growing areas — starting at Hood River and extending along the WashingtonOregon border to Milton-Freewater — have much in common with vineyards in Washington, and face
production issues that mirror those confronted by the Washington industry.
Oregon Winery Overview
The Oregon wine industry is relatively young. The first Pinot Noir vineyards were planted just over 40
years ago. Currently, the state is home to approximately 605 wineries, with the majority located in the
North Willamette Valley between Forest Grove and Salem. Known for its high-quality Pinot Noir wines,
5
Grape vines are pre-productive for 2-3 years.
©Northwest Farm Credit Services 2014
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Oregon’s wine industry experienced a boom over the last decade as U.S. consumers made Pinot Noir
a highly favored varietal. Most Oregon wineries are relatively small, with average annual sales of
around 4,000 to 5,000 cases.
Many Oregon wine producers enjoy the distinct advantage of being located near the state’s largest
population centers, which allows for a greater volume of direct sales. Because many of Oregon’s
wineries are small and have a ‘boutique’ quality focus, the prevailing price points of these wines are
higher than national averages.
Oregon has seen increased interest from out-of-state wine businesses since 2013. Jackson Family
Wines purchased 1,350 acres in two Willamette Valley vineyards and opened a tasting room during
the spring of 2014. In August of 2013, France-based Maison Louis Jadot purchased an Oregon
vineyard in Newberg.
Idaho Vineyard and Winery Overview
According to the Idaho Grape Growers and Wine Producers Commission, Idaho’s vineyards
encompass an estimated 1,800 planted acres, with about 1,600 of those acres currently in production.
The state’s wine output mostly consists of grape varietals that can withstand comparatively harsh
winter-weather conditions, as most of the growing areas are at elevations higher than 2,500 feet.
Known for growing and producing varieties such as Syrah, Viognier and Merlot, Idaho’s leading
varietals include Chardonnay, Riesling and Cabernet Sauvignon.
Idaho has an estimated 51 wineries that produce approximately 225,000 cases per year. According to
a study commissioned by Idaho Wines, the number of wineries in the state has more than tripled
since 2002. Ste. Chapelle Winery and Sawtooth Estate Winery account for more than two-thirds of the
state’s production. Most of Idaho’s wineries and vineyards are located in the Snake River Valley within
an hour’s drive of Boise. Wineries other than Ste. Chapelle and Sawtooth (both owned by Precept)
are independently owned, boutique wineries that primarily rely upon tasting-room sales and local
distribution to market their products.
The U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB) designated the Snake River Appellation
in April 2007, which has been a catalyst for industry growth. The industry has two proposed AVAs that
have been ‘accepted as perfected’ by the TTB. This means that the requests have been accepted for
formal review, but an AVA designation is not guaranteed.
Wineries in North Idaho’s Panhandle petitioned to create the Lewis-Clark Valley AVA that includes
areas in Nez Perce, Lewis, Clearwater, and Latah counties in Idaho, and parts of Asotin, Garfield,
Whitman counties in Washington. Wineries in the Snake River Valley AVA have petitioned to create
the Eagle Foothills AVA north of Eagle, Idaho. A different AVA is being pursued due to differences in
soil profiles and other differentiating factors. Barring any unforeseen developments, both AVAs are
expected to be designated in 2015.
Some continued growth in the number of wineries in the state is anticipated over the next five to ten
years, particularly if the new AVA is granted. However, most of the growth in Idaho’s wine industry’
will likely come from Sawtooth and Ste. Chapelle.
©Northwest Farm Credit Services 2014
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DRIVERS
Global Wine Production and Consumption
Global wine consumption has largely remained flat since 2009. Referencing the graph below, global
consumption appears to have stabilized near 240 million hectoliters (6.34 billion gallons) after trending
steadily upward through 2007. It is uncertain when consumption levels will rebound from the global
economic downturn that began in 2008.
Although the gap between global wine production and consumption had been narrowing, global wine
production rebounded in 2013 led by increases in Italy, Spain, and the United States. The expectation
of another large production year - relative to consumption - in 2014 may create pressure to move
inventory in global wine markets.
Global Production vs. Consumption
Millions of Hectoliters
300
280
260
240
220
200
Production
Source: International Organisation of Vine and Wine
Consumption
In addition to slow economic recovery in the global economy, anemic growth in world wine
consumption is a function of declining consumption in the ‘Old World’ wine growing regions of Europe.
According to the International Organization of Vine and Wine (OIV), European Union wine
consumption fell in 2013, led by declines in France, Italy, Spain, and Austria. This reflects a continuing
trend from previous years.6 Although European nations continue to have the highest per capita wine
consumption levels in the world, higher global consumption levels will be led by increasing interest in
wine by ‘New World’ wine consumers.
U.S. Wine Sales and Consumption
The United States is the largest wine market in terms of dollars. U.S. wine sales have been growing at
a rate of 2 to 3 percent per year for the past 21 years. The estimated retail value of 2013 shipments
was $36.5 billion; up 5 percent from 2012. Wines between $9.00 and $11.99 per bottle represented
the majority of sales. The category’s growth rate of 10 percent was instrumental in keeping the overall
sales trend up for domestic wines. However, consumers are trading up and spending more on wines.
Wines priced at $20-plus continued to enjoy the fastest rate of growth for bottled wines. 7
6
International Organization of Vine and Wine. “The Wine Market: Evolution and Trends.” May 2014. Available URL:
http://www.oiv.int/oiv/files/4%20-%20Statistiques/4%20%201%20Publications%20statistiques/OIV_NoteConjmars2014_%20EN_%20New_data_2.pdf
7
Thatch, Liz. “Trends in the US Wine Industry for 2014 – Sunny Cellars with Some Cobwebs.” March 2014. Available
URL: http://lizthach.wordpress.com/
©Northwest Farm Credit Services 2014
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Although Americans do not drink as much wine per capita as their European counterparts, U.S. wine
consumption is at an all-time high. OIV reports U.S. wine consumption at 323.8 million cases; a 0.5
percent increase from the previous year. (This figure excludes vermouth and specialty wines.)
According to OIV, the U.S. surpassed France to become the world’s largest wine consumer in 2013. 8
Estimated per capita wine consumption in the United States was 3.08 gallons in 2013, up 22 percent
from 2010. The table below shows the growth of per capita wine consumption in the United States
since 1970.
U.S. Wine Consumption Trends: 1970 to 2013
Per Capita
% Change
Year
Gallons
Year over Year
2013
3.08
1%
2012
2.73
3%
2011
2.68
2%
2010
2.53
2%
2009
2.49
2%
2008
2.45
0%
2007
2.46
3%
2006
2.40
3%
2005
2.34
4%
2004
2.26
3%
2003
2.20
3%
2002
2.14
6%
2001
2.01
0%
2000
2.01
14%
1995
1.77
-14%
1990
2.05
-16%
1985
2.43
15%
1980
2.11
23%
1975
1.71
31%
1970
1.31
-
% Growth
Since 1970
135%
108%
102%
93%
90%
87%
88%
83%
79%
73%
68%
63%
53%
53%
35%
56%
85%
61%
31%
-
Source: Wine Institute/ Gomberg, Fredrikson & Associates.
Note: All wine types including sparkling wine, dessert wine, vermouth, other special natural and table wine. Per capita
consumption is based on Bureau of the Census population estimates and would be higher if based on legal drinking
age population. Due to changes in reporting, figures include all non-sparkling wines not over 14 percent alcohol.
Recent consumption gains for wine have been driven by many factors including the following:
Resilient Consumers: Consumers are buying more and higher valued wines as the economy
continues to recover from the Great Recession. Sales of wine priced under $7.00 per bottle
have declined in 2014, according to Nielsen data.
Ubiquity of Quality: Quality wine is available at all price levels.
Product Variety: With thousands of new wine labels entering the market, Americans are
exposed to a diverse selection of wine choices, leading to an expansion of wine sales.
Favorable Demographic Trends: Boomers are the largest consumer of wines at all price
points. However, the ‘Millennial’ consumer (aged 21-37) continues to adopt wine as a
beverage of choice earlier in adulthood than previous generations. This group of consumers
represents 26 percent of legal drinking age Americans, and continues to be an important wine
sales growth driver.
8
International Organization of Vine and Wine. “The Wine Market: Evolution and Trends.” May 2014. Available URL:
http://www.oiv.int/oiv/files/4%20-%20Statistiques/4%20%201%20Publications%20statistiques/OIV_NoteConjmars2014_%20EN_%20New_data_2.pdf
©Northwest Farm Credit Services 2014
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Perceived Health Benefits: Reports discussing the health benefits associated with moderate
wine consumption have increased wine demand.
Impact of Economic Health on Wine Demand
Just a few years ago, the Great Recession caused consumers to change their wine buying habits.
Economic weakness resulted in reduced consumption, trading down to lower price points, and less
spontaneous wine buying. According to a Nielsen Company survey published in May of 2009, 24
percent of wine consumers opted for a cheaper bottle when ordering drinks at restaurants and bars.
Consumers also ordered fewer drinks in restaurants, or shifted to consumption at home.
As the health of the U.S. economy has improved, so has consumer confidence, which impacts wine
demand. Per the graph below, the Consumer Confidence Index peaked at 144.7 in May 2000 and fell
to its historic low of 25.3 in February 2009. Concerns about the U.S. and the world economy continue
to constrain consumer confidence, but the index has steadily improved since 2009.
Index Value (1985 = 100)
Consumer Confidence Index
200
180
160
140
120
100
80
60
40
20
0
Consumer Confidence Index
Present Situation Index
Expectations Index
Source: The Conference Board
The gradual rebound in consumer confidence has had positive impacts on the wine industry. With
improved conditions, consumers are increasingly interested in high-end and/or new brands, placing
only a modest focus on price. However, wine sales in restaurants have struggled to recover.
Consumer Tastes and Preferences
Data from the U.S. Census Bureau show that there are 76.4 million Baby Boomers. According to the
Wine Market Council, the Boomer generation forms the base of high-frequency wine drinkers;
consumers that drink wine more often than once a week. Boomers are also spend the most money,
on average, for a single bottle of wine. There are 70 million Millennials of legal drinking age in the U.S.
Millennials do frequently purchase wine over $20 per bottle, but unlike Boomers, Millennials are more
likely to purchase unfamiliar wine brands including less established wine regions and imports.9
Millennials value unique experiences and tend to be more adventurous. As a result, the wine industry
is seeing growth in popularity among craft and boutique wines and wineries.
The increasing acceptance of blended wines in the marketplace is an example of Millennials’ desire
for craft products. According to Nielsen data, red blends were the fasting growing wine by category in
2014, up 16.6 percent year over year. Additionally, major wineries are beginning to see increased
competition and loss of market share to smaller boutique wineries. Boutique wineries represent a
9
Wine Enthusiast Magazine. “Wine’s 2013 Report Card.” 2014. Available URL: http://www.winemag.com/Web2014/Wines-2013-Report-Card/
©Northwest Farm Credit Services 2014
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much smaller segment of producers that typically produce higher-priced wine. Illustrating the shift in
market share, an analysis of California wine sales for the first six months of 2014 revealed that
boutique wineries were the only segment of producers showing positive market share growth from
2013. 10
The growth in popularity among craft or boutique producers is also prevalent in the beer, cider and
spirits segments. The U.S. wine market is projected to have increased 1.5 percent during the first six
months of 2014, equating to growth of 2.5 million cases. In comparison, craft beer grew by 18 percent,
or 21 million cases, during the same period despite the fact that overall beer sales are trending down.
Cider is one of the fastest growing beverage segments, with a 69 percent increase that is equivalent
to 3.4 million addition case sales.11 Some in the wine industry are concerned about increased
competition for consumers’ attention, especially in the on-premise sales channel.
Marketing Channels
Historical Perspective
The U.S.’s antiquated three-tier system was designed to track alcohol movement from producers to
consumers through a complex set of licensing and legal obligations in order to minimize illegal
production and sale of alcohol. A producer, such as a winery, must sell to a distributor, who in turn
must sell to a retailer. The basic premise of the system is that only retailers may sell to consumers.
Consolidation in the number of distributors has been significant over the past two decades, primarily
in response to consolidation among retailers. The Stonebridge Research Group revealed that in 1998
there were 7,000 distributors and 2,000 wineries in the U.S. By 2008, there were an estimated 500 to
700 distributors, 5,000 wineries, and thousands of imported wines.12 Due to tighter margins, individual
distributors now carry more brands, but devote less time selling each brand. With distributors’ focus
on efficiently moving product, smaller wineries often find their product line is a lower priority and wine
customers often have trouble locating smaller brands through retail outlets.
With the increased prevalence of boutique and start-up producers, attracting a distributor and getting
placements in out-of-state restaurants is increasingly difficult. Out of necessity, smaller wineries are
taking more responsibility for their own marketing and shipping efforts via direct-to-consumer (DtC)
and direct-to-trade sales. However, the ability of small wineries to successfully market and ship their
wine direct to consumers has been hindered by existing state and federal distribution laws. For
example, many states allow their in-state wineries to sell directly to consumers, but prohibit out-ofstate wineries from doing the same. In-state wineries are allowed to sell direct to retailers, while outof-state wineries must use distributors.
Change is Underway
Industry players and consumers have succeeded in eliminating some of the barriers to direct
shipments of wine in court and via legislation.
In the fall of 2011, Washington voters passed Initiative 1183. The impact to Washington wineries has
varied, depending on their specific business model. I-1183 changed the retail landscape for ‘spirits’ by
eliminating state-owned liquor stores, allowing spirits to be sold in grocery stores and creating direct
competition with wine (and beer) for shelf space and consumer wallet share. I-1183 also altered the
10
Ciatti, John. “California & Global Harvest Updates & Supply Trends [PowerPoint slides]. Sept. 2014. Available URL:
http://www.winesymposium.com/images/WIFS2014/5_Tuesday_2014_JohnCiatti.pdf
11
Ibid.
12
Stonebridge Research Group. “Stonebridge Research Group Announces Website and New Offices in Napa.” Sept 2008.
Available URL: http://www.stonebridgeresearch.com/docs/SBinfopressrelease.pdf
©Northwest Farm Credit Services 2014
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landscape of the Washington wine industry by allowing new out-of-state players into the market and
enabling large wineries to self-distribute and offer quantity discounts.
Starting in January of 2015, Massachusetts residents will be able to purchase wine directly from statelicensed wineries. This will bring the number of U.S. states that allow some form of direct-to-consumer
shipping to 42. Massachusetts’ historical shipping statues were ruled unconstitutional and
discriminatory in 2008. That ruling was upheld in 2010 by the 1st Circuit U.S. Court of Appeals.
Domestic Wine Sales by Channel
Although the wine industry’s distribution system is being modified, distributors continue to dominate
wine sales. Approximately 80 percent of U.S. wine sales are off-premise (retail) and 16 percent onpremise (restaurants). Direct-to-consumer (DtC) and Direct-to-Trade sales account for all other
sales.13 According to Wines & Vines, off-premise sales for the 12 months ended in October 2014 were
up 6 percent, while DtC sales were up 13 percent for the same period.14 On-premise sales are
generally flat and remain below pre-recession highs.
U.S. Export Markets
The industry’s desire to participate in new markets, minimization of trade barriers, global wine
consumers’ interest in new varieties, and a relatively weak U.S. dollar for the past several years are
factors supporting increasing exports.
According to Wine Institute, the value U.S. wine exports jumped by 16.4 percent to reach a record
$1.55 billion in 2013. This marked the fourth consecutive year of increased exports. The volume of
U.S. wine exports was 48.4 million nine-liter cases, up 7.5 percent. Exports growth was driven by
strong demand from the European Union, Canada, Mexico, and China. The primary export market for
U.S. wine is the European Union. Forty percent of U.S. wine exports by value were shipped to the 28member countries of the EU. This market accounted for $617 million of export revenues in 2013, up
31 percent from 2012. 15 The table below compares U.S. wine exports by primary market.
U.S. Wine Exports in 2012 and 2013 (Preliminary Figures)
Value in U.S. Dollars
Volume in Liters
2013
2012
% change
2013
2012
% change
EU
$617,251,533
$470,560,073
31.2%
244,638,002 225,729,342
8.4%
Canada
$453,569,934
$404,755,780
12.1%
72,756,257
65,721,484
10.7%
Japan
$101,588,539
$109,635,188
-7.3%
29,425,475
29,653,027
-0.8%
Hong Kong
$77,563,646
$88,314,110
-12.2%
11,680,425
13,625,805
-14.3%
China
$77,206,981
$73,014,089
5.7%
17,855,934
17,652,257
1.2%
Mexico
$21,503,228
$17,745,742
21.2%
8,960,669
7,639,862
17.3%
South Korea
$18,315,543
$15,842,598
15.6%
4,414,312
3,997,640
10.4%
Switzerland
$17,081,503
$11,794,974
44.8%
3,899,206
4,278,273
-8.9%
Vietnam
$12,727,695
$14,494,502
-12.2%
1,726,207
960,133
79.8%
Singapore
$11,633,251
$10,531,467
10.5%
2,327,058
1,989,482
17.0%
Russia
$11,099,116
$5,275,239
110.4%
1,916,535
1,670,864
14.7%
Other
$134,964,227
$113,656,136
18.7%
35,635,611
31,881,227
11.8%
Total
$1,554,505,196 $1,335,619,898
16.4%
435,235,691 404,799,396
7.5%
Source: Wine Institute and Global Trade Information Services, using data from U.S. Dept. of Commerce.
13
Thatch, Liz. “Trends in the US Wine Industry for 2014.” March 2014. Available URL: http://lizthach.wordpress.com/
Wines & Vines. “Wine Industry Metrics.” November 2014. Available URL:
http://www.winesandvines.com/template.cfm?section=widc
15
Wine Institute. “California Wine Exports Reach All-Time High in 2013.” February 2014. Available URL:
http://www.wineinstitute.org/resources/pressroom/02262014
14
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Approximately 90 percent of U.S. wine exports are from California. However, Washington is the
nation’s next largest wine exporter and is strategically positioned to continue to expand into Asian
markets such as China and South Korea. Historically, Asian countries have shown the fastest growth
rates in terms of export market growth. In 2014 and likely in 2015, U.S. wine exports will be pressured
by a higher valued U.S. dollar and increased competition from Chile, Australia, and Argentina.
U.S. Wine Industry’s Response to Growing Demand
In response to growing demand for wine and wine grapes, vineyard planting activity has increased in
the United States. Although the domestic wine industry remains focused on California, limits to
expansion in California suggest that other wine producing regions, including the Pacific Northwest, will
play an increasingly important role in industry growth moving forward.
California
California’s 2013 wine grape crush set a second consecutive record at 4.2 million tons, an increase of
4.5 percent over the 2012 harvest. According to the USDA’s Pacific Regional Crop Production Report
of August 2014, California's wine grape production for 2014 is forecast at 3.9 million tons, down 8
percent from 2013's record crop. The 2014 grape harvest began as early as July in some areas
according to the California Association of Winegrape Growers. The mild spring coupled with little
spring frost and a warm, dry growing season led to the early harvest.
Historical California Grape Crush
5000
Thousands of Tons
4000
3000
2000
1000
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Red Wine
White Wine
2014 Forecast
Source: California Department of Food and Agriculture Grape Crush Report, 2013
California is facing an oversupply of wine inventories going into 2015. Record grape harvests in 2012,
2013, and 2014 have produced an abundance of wine. In particular, the 2013 harvest filled tanks and
slowed movement in the supply chain. Producers are concerned about inventory turnover, where
options include heavy carryover or lower prices to promote sales. The relatively large 2014 grape
crush exacerbates the supply situation and complicates decision making.
However, abundant wine supplies are thought to be a short-term challenge. During the height of the
recession many older vineyards were removed. Since then the pace of vineyard replanting has
generally been described as barely above replacement pace and not aligned with growing consumer
demand. Many in the industry believe that within two years, shortages of grapes at target qualities and
prices will emerge.
Expansion of vineyard acreage in California going forward will be constrained by the following factors:
Drought: According to an article posted in Wines & Vines, nearly 60 percent of Californians
are now suffering an ‘exceptional drought.’ The economic impact of drought so far has
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equated to $2.2 billion and almost 430,000 acres of irrigated cropland eliminated from
production primarily from the Central Valley, Central Coast, and southern regions of the state.
Although drought has yet to significantly impact to the California wine industry, vineyard
owners are wary of the potential in 2015.
Land Availability and Costs: In California, irrigated ground suitable for vineyard plantings
may be more profitably planted to tree fruits and nuts. Almonds and pistachios in particular
have seen significant growth in demand and revenue in the past decade. Given scarce
availability of desirable vineyard sites and increasing competition with tree nuts and other
permanent crops, land prices continue to rise. More expensive vineyards place upward
pressure on grape and wine prices.
Pacific Northwest
The Pacific Northwest continues to gain notoriety in the U.S. and global wine markets. The region
continues to prove itself as a high quality grape growing and wine producing region.
With limitations in California, large players in the California wine industry have ventured into
Washington and Oregon seeking lower cost vineyards and product diversification. Large players,
including E & J Gallo, Duckhorn, and Kendall-Jackson, are beginning to break into the Pacific
Northwest. The majority of these new players are seeking to enter the premium and ultra-premium
marketing segments. These companies have well established marketing and distribution, which
should lead to increased demand for Washington wines in the U.S. and abroad.
Gallo has indicated they want to penetrate 10 to15 percent of the Washington premium market over
the next 5 to 10 years. Vineyard producers in proven locations will likely see increased contract prices
and/or increased demand for new vineyard development. Another major player showing interest in
Washington is Napa, California-based Duckhorn. In late 2013, Duckhorn announced it would launch a
Cabernet Sauvignon using grapes from Washington’s Red Mountain AVA and produced in Walla
Walla. Duckhorn also announced the purchase of 20 acres of undeveloped land on Red Mountain. In
addition, Aquilini, an investor out of Canada, has also made some key acquisitions as a means of
entering the market, including 670 acres on Red Mountain in 2013 and 694 acres of vineyard in the
Horse Heaven Hills in 2014. The low amount of available acreage in proven wine grape-growing
areas is making it difficult to break into Washington vineyards, but those with sufficient capital see the
overall value.
Oregon has also experienced increased interest from out-of-state wine businesses since 2013.
Jackson Family Wines purchased 1,350 acres in two Willamette Valley vineyards and opened a
tasting room during the spring of 2014. In August of 2013, France-based Maison Louis Jadot
purchased an Oregon vineyard in Newberg. This activity has helped to boost vineyard land values in
the state.
The Northwest is positioned to take advantage of U.S. wine industry growth with a strong trend of
increasing grape production. Both Washington and Oregon are projected to have harvested record
crops in 2014. In Washington, early results show an estimated crop size of approximately 230,000
tons; an increase of nearly 10 percent compared to the previous record harvest of 210,000 tons in
2013. Oregon also harvested what is expected to be a record crop. In addition to favorable weather
patterns, growth in both crops is attributable to new blocks of vines coming into production.
Other Wine Producing Regions of the U.S.
Wine is now produced in every state in the U.S. Outside of California and the Northwest, wine industry
growth is focused in New York, Virginia, and Texas. Growing consumer demand for wine, particularly
local, craft wines, bodes well for continued growth in these states.
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Wine Imports
Growth in U.S. wine consumption continues to outstrip growth in domestic wine production, leaving
room for imported wine to find increased favor with U.S. consumers. Since 2003, U.S. imports of wine
have grown 81.5 percent by volume and 62.1 percent in terms of dollars.16
According to trade data from the USDA Foreign Agricultural Service, U.S. imports peaked in 2012 at
132.7 million case equivalents. The relatively low global grape harvest that year created the
perception of a global shortage of wine, which spurred U.S. imports to rise 15.0 percent year over
year. U.S. imports fell 5.6 percent in 2013, likely due to back-to-back bumper grape harvests in
California. A year to date comparison to 2013 reveals that as of October wine imports were moving at
a slower pace in 2014, also likely due to the large California grape crops.
The graphs below show U.S. wine import volumes and values for the top six countries of origin from
2003 to 2013. In total, these countries represented 83.1 percent of imports volume and 86.4 percent
of import value in 2013.
Top Six U.S. Wine Import Sources by Volume and Value: 2003 to 2013
U.S. Case Equivalent Imports (in millions)
35
30
25
20
15
10
5
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
France
Argentina
Italy
Spain
Australia
Chile
Per Case Value of U.S. Imports
$120
$110
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
France
Argentina
Italy
Spain
Australia
Chile
Source: USDA FAS Global Agricultural Trade System
In terms of volume, wines from Italy and Australia comprised 42.6 percent of U.S. imports in 2013.
Australian wines, however, have fallen out of favor with U.S. consumers in recent years. Imports from
Chile, Argentina, and France have generally been increasing to offset the decline.
While the volume of wine imported to the U.S. peaked in 2012, the value of wine imports increased
3.7 percent year over year to $5.3 billion. Italy and France accounted for 57.4 percent of the value of
U.S. wine imports in 2013. While Italian wine volume has increased dramatically since 2009, value per
case has held relatively steady. On the other hand, the volume of French wine imports has remained
fairly steady, while the value per case has improved since 2009.
As European wine consumption continues to fall, the U.S. is a key target for increased sales. Larger
harvests in the EU the past two years will increase pressure on Europeans to move wine. Additionally,
the increasing value of the U.S. dollar will promote imports for the foreseeable future.
16
Northwest FCS analysis using data from USDA Foreign Agricultural Service’s Global Agricultural Trade System
(GATS). Available URL: http://apps.fas.usda.gov/gats/default.aspx
©Northwest Farm Credit Services 2014
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BEST PRACTICES
The following points summarize ‘best practices’ common among successful vineyard and winery
operations. For the sake of this discussion, it is accepted that most successful operations employ best
industry practices in the area of production to maximize product quality and economic return.
Accordingly, the following discussion of best practices is confined to marketing and finance.
Marketing
Successful vineyard owners:
o
o
o
o
o
o
o
Carefully align their long-term strategic production goals with the practical needs of the
winery and the general marketplace where that fruit will be marketed.
Develop market alliances before the vineyard is designed and planted.
Give careful consideration to critical factors around vineyard establishment (trellis type,
irrigation system, plant spacing, elevation, row direction, soil type, slope orientation,
rootstock, clones, AVA, site selection, etc.) that can profoundly impact quality,
production and marketing throughout the life of the vineyard.
Have a vineyard branding strategy and create additional value in the vineyard asset
through effective marketing of grapes to reputable wineries.
Broaden their marketing to multiple wineries, and strive to produce high quality grapes
that will merit vineyard designated wines.
Utilize long-term contracts with wineries to minimize marketing risk.
Partner with reputable vineyard management companies who can help maximize fruit
quality and raise the overall profile of the vineyard in the marketplace.
Successful winery owners:
o
o
o
o
o
o
o
o
o
Develop strong branding and marketing strategies.
Craft a story around their brand that is authentic and durable in the marketplace, and
that is further enhanced by the personality and energy of the owners.
Genuinely enjoy people and marketing, and don’t tire of telling their story over and over
again - an essential requirement of a winery owner.
Have a distinct channel strategy and effectively develop all three traditional marketing
channels (retail, wholesale, and distributor).
Align themselves with reputable and financially sound brokers and distributors.
Closely participate in the marketing process in all channels.
Produce high quality wines, differentiating their brand, not with the occasional high
score or good review, but with consistently strong recognition year after year.
Develop wines at multiple price points that will accommodate changes in market
demand and normal variations in quality from vintage to vintage.
Consider replacing wine brokerage relationships with in-house sales staff to gain better
representation of the wines in the marketplace.
Finance
Successful vineyard owners:
o
o
Resist the notion that appreciation is guaranteed over time on a land and vineyard
investment (a common investor motive), and carefully manage vineyard costs to
generate annual cash on cash returns.
Utilize long term contracts to limit downside risk.
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o
o
Continually challenge conventional vineyard production practices that add cost without
materially improving grape quality.
Utilize crop insurance and other risk management tools to minimize income volatility.
Successful winery owners:
o
o
o
o
o
o
Align with accounting firms who have a solid understanding of the unique accounting
characteristics of the wine industry.
Develop high quality accounting systems that provide internal and external audiences
with a clear understanding of accrual earnings and balance sheet health.
Develop clear financial performance metrics that allow them to compare their operation
to industry benchmarks.
Are smart about deploying capital and focus capital resources, if limited, first on
inventory and brand building, and then on development of hard assets such as land,
vineyard development and winery facilities.
Maximize utilization of their winery capacity with their own production, or market their
unused capacity by sharing space with another winery.
Maintain health in their balance sheet, particularly liquidity, recognizing that the wine
industry is highly cyclical.
In summary, much of financial management is about preparing the company’s balance sheet to
withstand the inevitable next down cycle. When the industry is in distress, wineries can expect lower
margins with pressure on quality and price. Growers can expect downward pressure on grape prices
with increasing expectations for quality and slowing of new vineyard development. Meanwhile,
consumers will enjoy a period of great bargains.
Beyond this period, a new phase will develop where supply and demand will rationalize, and prices
and general market conditions will begin to once again tilt in favor of vineyard and winery owners.
Owners who have positioned their operation to survive adversity will be ready to take advantage of
opportunities in a recovering market.
©Northwest Farm Credit Services 2014
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APPENDIX
Measurements
The following table shows frequently used metrics in terms of liters and bottles.
Metric
1 bottle
1 case
1 gallon
1 hectoliter (hl)
1 million hectoliters (Mhl)
Liters
Bottles
0.75 liters (750 milliliters) = 1 bottle
9 liters
= 12 bottles
3.79 liters
5 bottles
100 liters
133 bottles
100,000,000 liters
133.3 million bottles
American Viticultural Areas (AVAs)
Washington
The map below shows the 13 AVAs for the state of Washington. The majority are concentrated east of
the Cascades.
Source: Washington Wine Commission
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Oregon
The map below shows the 16 AVAs for the state of Oregon. The majority are concentrated to the west
of the Cascades.
Source: Oregon Wine Board
Idaho
The state of Idaho has just one AVA; the Snake River Valley. It is located in southwest Idaho.
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