THE DUNNIGAN HILLS. The Kelsey Bench. Fiddletown. Edna Valley. Lodi.
These disparate California regions would seem to have little in common, other than their rural ambience and dependence on agriculture. But they all share an unenviable quality: they’re in deep economic trouble.
That’s because their primary crop — wine grapes — are not in high demand. In fact, grape prices have become so low for these and other California wine-producing regions that many vineyards have been abandoned.
“The pain is not evenly distributed, but there aren’t any regions that are doing great,” said Erik McLaughlin, the CEO of Metis Mergers & Acquisitions, an advisory firm that specializes in the wine industry. “The problems are focused more on the value end rather than the premium side of the market, but the entire industry is affected.”
Twenty-five years ago, it seemed you couldn’t go wrong planting winegrapes. Demand for California wine was booming, outstripping the supply from esteemed and long-established viticultural regions such as Napa and Sonoma counties. The San Joaquin Valley took up much of the slack, producing bulk wines that could either be blended into higher quality wines from other regions, or bottled in jugs as low-priced “plonk.”
But churning out wines made from cheap, unremarkable Central Valley grapes didn’t cut it with the evolving wine-drinking public. As their knowledge, sophistication and bank accounts grew, wine consumers began to demand better wines from specific growing areas, or “appellations.” That’s because different regions produce wine grapes with varying characteristics. This “terroir” is a major marketing point for wine.
For aspiring winegrape growers and vintners, that was a problem. Land in Napa and Sonoma was prohibitively expensive. Many of them came to the same conclusion: if they couldn’t plant grapes or make wines in known and respected viticultural areas, their wisest alternative was lobbying for recognition of alternative — and affordable — areas.
Joining the AVA club
The process is straightforward enough: growers send petitions to the Alcohol and Tobacco Tax and Trade Bureau, an agency under the U.S. Department of the Treasury. Petitions are granted once government reviewers determine the candidate region has sufficiently unique geographic, climatic and soil characteristics to qualify for approval.
Vintners could then print the name of their “American Viticultural Area” (AVA) on their wine labels; and typically, growers in these newly recognized appellations could expect a bump in the prices they charged for their grapes.
That worked for many years, particularly given the stratospheric prices that developed for grapes and wines from the hallowed Napa and Sonoma Valleys. Wines from Lake, Amador, San Luis Obispo, Yolo and Monterey Counties didn’t have the cachet of Napa and Sonoma vintages, but many were good — even very good — and they were a lot cheaper.
he said. (Wine Business Analytics via Bay City News)
But that all began to change a few years ago. Simply put, Americans started drinking less. And of all alcoholic beverages, wine arguably took the hardest hit.
“Baby Boomers drove the growth of the wine industry,” said Andrew Adams, the editor of Wine Analytics Report. “Now they’re drinking less. Younger generations also aren’t drinking as much [as younger people in the past], particularly wine. I think we’re seeing a structural reset in the wine industry. None of the playbooks that worked over the past 20 years are working now.”
The downturn is affecting vineyardists more than winemakers at this point, said McLaughlin.
“Some winemakers are sitting on three-year inventories,” McLaughlin said, “but they can address that to some extent by buying less fruit, making less wine, and discounting their wine in inventory until they reach equilibrium. But that means the demand for grapes is deaccelerating even more rapidly than the demand for wine, and that really hurts the growers. They have to sell a crop every year.”
Or not sell a crop. McLaughlin observes a 5% decrease in a winery’s sales can translate to a 20% to 40% reduction in grape intake.
“That’s why you’re seeing so much vineyard removal, even in Sonoma and Napa,” said McLaughlin.
The price of too much variety
And if grape demand is weak in the Mecca of California wine, it’s far worse in the once-popular “value” appellations. Recovering from the collapse may not be impossible, said Jeff Bitter, the President of Allied Grape Growers, a grower-owned winegrape marketing association, but it will likely require a dramatic reversal from past marketing strategies — and perhaps lowered expectations.
“In the Eighties and Nineties, the proliferation of AVAs was largely driven by wineries and growers wanting to differentiate and promote themselves,” Bitter said. “They wanted to emphasize their uniqueness, they felt they needed to stand out from all their competitors.”
But that push for differentiation also had a certain alienating effect for consumers — particularly as interest in drinking waned.
“Sometimes there can be too much differentiation,” said Bitter. “It can be confusing and intimidating. The boom in AVAs went hand-in-hand with the concept of wine as craft, wine as an artisanal calling — but it could also be paralyzing for the consumer. Too much choice can be as discouraging as too little. In that scenario, the highly recognizable appellations like Napa and Sonoma are going to dominate.”
Now, with wine consumption dramatically ebbing, growers in the newer and lesser-known appellations are finding there’s no home for their grapes.
“The wineries just need less fruit,” said Christian Miller, the director of research for the Wine Market Council, a market research firm that concentrates on U.S. wine consumption trends.
“There’s an oversupply of winegrapes from all regions,” Miller said. “Consolidation in the industry is another factor. You have these big conglomerates like Constellation buying up wineries and labels all over the state. That gives them immense power in setting grape prices — even for Napa and Sonoma. And even if they do buy fruit from other appellations, the price is liable to be too low for growers there to turn much or any profit.”
The current trends don’t necessarily reflect poorly on the quality of the fruit from “alternative” appellations. Lake County produces some spectacular cabernet sauvignons. The Edna Valley in San Luis Obispo County remains highly regarded for its rich, full-flavored chardonnays. And Lodi has become known as a prime region for zinfandel — not that its hard-won reputation is much comfort to growers there these days. Along with drinking less wine generally, consumers are spurning some varietals that were once sought after — zinfandel among them.
“I feel bad for Lodi, because they did everything right — marketing, matching varietals with their area, promoting sustainability — and they’re still struggling.”
Christian Miller, Wine Market Council
“I feel bad for Lodi,” Miller said, “because they did everything right — marketing, matching varietals with their area, promoting sustainability — and they’re still struggling. Zinfandel was once extremely popular, but over the years it gained a reputation for high alcohol content. Then it started getting squeezed out by red blends from established labels — proprietary, high-quality red wines blended from different varietals that had the same sensory attraction of Zinfandel, coupled with real brand muscle.”
Surviving on other crops
Growers in some appellations may be able to find alternatives to wine grapes — but that’s more an exception than a rule.
“Monterey County has a major oversupply of grapes, but it’s also a prime region for vegetables, so some growers there might be able to make a successful transition,” said Adams, “but other regions don’t have many options. Land is likely too expensive for [less valuable] alternative crops, and water can also be an issue. You’re also liable to see development pressures in some of these areas as winegrapes come out, though California’s land use policies are stringent, and that may be less of an issue here than in some other states.”
As noted, some growers are getting out of the game entirely, abandoning or tearing out their plantings. Others are “mothballing” their vineyards by reducing irrigation and cultivation, eliminating fertilizers, pruning minimally and forgoing harvests. Such vineyards can be brought back into full production relatively easily if prices improve.
But that’s a big if.
“I don’t think it’s the end of everything,” said McLaughlin, “but I’m not sure it’s just cyclical — that we eventually get back to where we were at the peak. This feels more like a secular change.”
In other words, we’re likely to end up with a smaller wine industry, one in which grape supplies and the number of wineries reflect the smaller pool of wine drinkers. We’re also likely to see less emphasis on AVAs as a marketing strategy, said Bitter.
“With all the consolidation among both wineries and distributors, there’s been a major push for simplifying, even commoditizing, wine,” Bitter said. “That’s especially true for the lower end — under $20 a bottle. The big conglomerates have a lot of labels, and they’re not interested in promoting the unique attributes of one AVA or another.
“They’re focused on brands. They’re letting people build a brand, put the sweat equity into promoting it, and then they buy it and run with it as far as they can. Once a brand fizzles, they bring the next one up. The homogenous products — ‘California’ wines instead of wines from specific AVAs — dominate.”
