Victim of its own excess

With growing imports and a surplus of home-grown grapes, there is a lot of cheap wine sloshing around in the States right now. Patrick Schmitt reports

ALTHOUGH SOME in the US are sensing an increasingly threatening enemy at the gates, it is actually the situation within the city walls that is of real concern. Imports may be beginning to breach this well protected and self-sufficient market, but it is an oversupply of home-grown grapes that is really doing the damage, driving a drop in the price of wine.

Glut may be an overstatement, crisis an exaggeration, but the picture ain’t as rosy as California’s Zins.  But let’s look first at the production and consumption of wine in the US as a whole. North America is the world’s fourth largest producer of wine, generating some 20 million hectolitres (nearly 240 million cases), of which 90% come from California.

This production amounts to around 9% of total global wine production, compared to 3.2% from Australia but 21% from France.  On the other hand, the retail value for all wine sold in the US is US$21 billion, the highest in the world.  This is approximately 40% greater than that of France, despite the fact the French manage to put away 1.7 times more wine than the US by volume.

The difference arises due to a high average retail value of a bottle of wine in the US; US$7 compared to France’s US$3.30.  Out of that US$21 billion, Chardonnay accounts for 27% of the revenue, Merlot 15%, Cabernet Sauvignon 13%, White Zinfandel 8% and Sauvignon Blanc 3%. In terms of volume, it’s Cabernet, Chardonnay and Merlot that showed significant increases in 2002 and although Pinot Grigio and Syrah also expanded by large percentages, it was from a much smaller base.

As for the US share of its domestic market, about two out of every three bottles sold in America in 2002 were from California – the State’s wineries account for 67% of the market. Aside from this, 25% of wine consumed in the US is from abroad while States other than California account for 8% (all 50 States now produce wine).

But imports are on the rise, up from US$2.27bn in 1999 to US$2.77bn in 2002. This represents an increase in value of 22% and, as well as still wines, sparkling wines show an upward trend, increasing by 28% between 2001 and 2002, most of which were Champagne imports from France, while Port rose 48.3% over the same period. Sherry imports, on the other hand, declined by almost 11% between 1999 and 2002.

However, the real threat comes from Australia, which seems single-handedly to be driving growth in imports in the US. Aussie wines have accounted for about half the rise in imports since 1999 and currently represent almost 54% of bulk table wine imports, amounting to almost US$16m in value.

If there’s one brand that’s really given Americans cause for anguish, it’s Casella’s Yellow Tail, which has set growth records not just in the US, but for the entire wine industry. In 2002, for instance, the brand’s first full trading year, around 2m cases were sold in America and it is estimated Yellow Tail could shift anywhere between 4m and 8m cases this year.

The wine is currently the best selling Australian brand in the US, with a market share of 23.4%, surpassing both Southcorp’s Lindemans and Rosemount with market shares of 21.1% and 17% respectively.

Yellow Tail has also recently pipped Italy’s Riunite as the number one imported wine in the States.  So what’s prompted this sudden and sensational surge in sales? Well, it seems it’s a combination of suitable styles, bold packaging, the right price point and effective distribution.

The taste was engineered specifically for the American market and the innovative label design with its bright Kangaroo literally leaps from the shelves. Consistency in flavour is also key.  Then the price, US$5-7 retail, has plugged a gap left by other large Aussie rivals who have targetted an above-US$7 sector in response to a nationwide fall in demand for "jug" wine (those below US$5).

Lastly, and vitally, much of Yellow Tail’s achievement is due to distribution.  Casella cleverly cut a deal with the large importer WJ Deutsch & Sons, giving it a 50% equity stake in the brand and thus a true incentive to really shift the wine.

As David Cox, vice president regional director in Europe for Brown-Forman wines comments: "With brand Australia, people have really been sucked in, and Yellow Tail’s theatre in store has been done well. It is a lesson to us all about building consumer dialogue – people reach out for the brand beyond just price and packaging."

However, how about the wider implications of this story?  IsYellow Tail alone to blame for fierce price competition in the US?  What about the increasing presence of Australia as a whole in the American wine industry?  John McLaren, Britain’s representative at the Wine Institute of California, believes the US can absorb the influx of Yellow Tail because America is "such a big market".

He also adds: "There is a danger for Australia in the States as acceptance comes through price.  The wines are not hitting the States at the same point in that market’s development as they were in the UK, where people were looking for more sophisticated wine with some residual sugar." So, for example, Mclaren suggests South Africa could "sweep in with cheap wine and take the Australian share back again". In the UK, on the other hand, "You are not going to take the Aussie market overnight," he believes.

However, there is much to suggest Australia’s increasing share is not purely price-driven. A comparison with Chile might provide a clue to this. Chilean wines were particularly prominent in the US during the 1980s and early 90s due to competitive pricing but their share subsequently fell.

Commentators claim this was both because Chile failed to build brands as well as significantly raise the quality of its exported wines.  Australia, on the other hand, has not only differentiated its wines using price, but quality and marketing too. No doubt a more sustainable approach.

But, although US wine producers would be ill advised to be complacent in the face of growing imports and increasing price competition from foreign brands, there’s a greater problem directly under their noses.  This comes in the form of a swelling domestic supply of grapes, driven by extensive plantings in the mid to late 1990s. In 2002 for example, in California alone, 3.1 million tons of wine grapes were harvested, a figure that’s up 3% on the previous year and marks the second largest on record according to the California Department of Food and Agriculture. Furthermore, this was despite low yields, suggesting the full impact of increased vineyard acreage is yet to be felt.

At present, there is an estimated Californian wine resulting in a 10% fall for last year’s average wine price compared to 2001.

So, not only are American wine producers suffering from significant pricing pressure due to cheap imports and a current oversupply, but it looks as though the full force of the surplus is yet to be delivered.

And although wine consumption in the US is increasing – at a rate of around 3% to 4% every year over the last 10 years – it seems the only real solution for this ongoing oversupply is for America to increase exports, not an option US producers have traditionally considered (because their local market is big enough and price points as well as margins tend to be higher at home).

For exports to increase, however, American winemakers must convince consumers abroad that their products are of a high standard as well as competitively priced, but at the moment US wines are both expensive compared to other New World competitors and perceived as poor quality.

Nevertheless, American wine exports increased 1.3% between 2001 and 2002, reversing a 3.2% downward trend occurring from 1999 to 2001, although volume declined between 2002 and the previous year.

Country by country, the UK was the largest export market for US wines, representing 34.3% of US exports, and in 2002 this amounted to US$188.9m, an increase of 11.5% over 2001. Canada is the second largest market at US$92.9m although exports to this country declined for the second year from a peak in 2000.  Japan is the third largest export market, followed by the Netherlands. 

Overall though, it seems US export fluctuations are largely controlled by the strength of the dollar, hence 2002’s value increase but volume drop.  A current and projected weak dollar could change this situation, helping US exporters and potentially hindering importers, but any real changes will result only if American producers really work to develop export markets.

However, at present, it is not exports that will solve the supply issue.  Instead there is another force at work that could absorb some of the surplus. This has emerged in the form of a surging "super-value" category, led by the sudden and unexpected sales success of Charles Shaw, a brand better known as "Two-buck Chuck". This consists of a range of US$1.99 single varietal wines, which sold over a million cases in their first month – December last year – despite no marketing support.

News spread about the wine according to Jim Carter from the Bronco Wine Company, owner of the brand, after the editor of the LA Times got hold of the wine, liked it and questioned how a perfectly drinkable product could be on sale for under US$2.  The story eventually made CNN news. And the result has been, according to Carter, that "people are now willing to experiment with what used to be a forbidden price point".

He also comments that you can now find wines in the US at "US$6 to US$8 that used to be US$30 and there are many really good wines under US$10".  But that still leaves the question of how Bronco manage to create an acceptable wine at such a low price point? Carter quickly makes this clear: 

"We’re a large grower, probably the largest in the world, we have a very large, efficient winery, beautiful equipment, excellent winemakers, we own our own distribution company and there is no promotional material.   It is tight integration that makes it work." 

But the simple fact is, brands such as Shaw, as well as others created to capitalise on the grape oversupply, are encouraging consumers to trade down, exacerbating a depression in wine industry returns.

On the other hand, they are helping to absorb much of the glut – some have even claimed Two-buck Chuck has helped clear a Chardonnay surplus – as well as attracting more new consumers into the world of wine.

As Simon Legge, Brown-Forman marketing director for Europe says: "Two-buck Chuck might just have been an injection of excitement that enticed more people into wine, and although it has, I’m sure, led people to trade down, it has also attracted new conusmers, just like price promotions in the UK."

However, as mentioned above, this is not a temporary situation. The wine surplus is not about to end, and future harvests are likely to be equally large if not even greater.  Legge is realistic about the problem. "In all honesty," he says "the US, is probably looking at about two to three years for supply to get back in kilter with demand."

This readjustment of supply will result partly from the grubbing up of vines but also possibly from Pierce’s Disease which is spreading quickly across southern California.  Although it has been endemic in the US for some time, Pierce’s Disease has had a restricted impact due to the limited range of its host insect.

However, it has found a new host, the sharpshooter, which travels both faster and further. On the demand side, however, new brands and deep price cutting will mop up much of the surplus and, as McLaren believes,  "The situation will solve itself.  But," he adds, "at the moment there is a lot of cheap wine around."

Overall, increasingly tough global competition coupled with persistent surpluses is causing falling prices in the US.  The situation is further aggravated by a continuing concentration of buying power by wholesalers. 

Nevertheless, the mix of low per capita consumption, an aspirational society and maturing demographics, means the US market for wine has enormous potential for growth, and it’s already the biggest in the world.