Land of opportunity

With both domestic wine consumption and exports on the rise, the US is increasingly open to imports.  "Extreme value" and super-premium wines are leading the charge in this polarised market.  Penny Boothman reports

CONSUMING just over 11 bottles of wine per capita, the average US drinker isn’t necessarily considered the most lucrative for the wine trade – especially compared to the likes of Luxembourg or France.

But the latest statistics are showing that more and more people in the Land of the Free are discovering wine.  And the category is fast evolving.

It helps that the US economy is strengthening again following the events of September 2001, with the country’s GDP rising 4.4% over the first quarter of 2004.  Supermarket giant WalMart Stores Inc reported total sales growth of 12.8% over the same period (RILA), indicating a positive and healthy economy.

At the same time currency exchange rates have led to a rise in exports of US wines.  But on the domestic front consumption continues to grow, with imports to the US, and California in particular, seeing a significant rise.

According to the stats, domestic wine sales in the US have almost doubled in the last 10 years from US$11 billion in 1993 to US$21.6bn in 2003 (Wine Institute of California), with total market growth of 1.9% (MAT to week ending 26.06.04).

More Americans are now choosing wine as their preferred tipple, and in the last three years alone, numbers of regular wine drinkers in the US have grown by six million adults.  Yet the recent history of the US wine market has been something of a rollercoaster ride.

The enormously influential CBS 60 Minutes programme, "French Paradox", broadcast in 1992 encouraged many Americans to move over to wine by suggesting that red wine may be responsible for the French suffering a relatively low incidence of coronary heart disease, despite their diet being rich in saturated fats.

The resulting surge in demand led to wine shortages in the 1990s, which in turn led to massive over-plantings as producers over-estimated demand.  This over-production naturally resulted in a fall in grape prices and scores of new brands reaching the market at exceptionally low prices – enter the "extreme value" category.

Headed up by the Charles Shaw brand in Trader Joe’s stores – now more popularly known as Two-Buck Chuck, reflecting its US$2 price tag – these wines drove growth for the whole category throughout 2003.

Last year 6.8m cases of extreme value wines were sold, making up 13% of domestic wine shipments, and sales volume in the sub-US$2.99 price band grew by a staggering 1,838.2% during 2003 (ACNielsen).

That’s a lot of wine, and domestic consumption is rising, up 9.63% in 2001 to 24,166hl from the previous four-year average of 22,043hl (WIC).  "The US consumers’ relationship to wine is changing," comments Erik Jepson, senior brand manager for Fetzer Vineyards at Brown- Forman.

"People used to treat wine as a drink for special occasions, but we’re starting to see a shift in the US towards wine becoming an everyday beverage.  We’re starting to see consumption go up and we see that as being a long-term trend, so that’s really good news for us."

California is the spiritual home of the US wine industry and the Golden State makes 90% of the wine produced in the US.  Californian wine accounts for 67% of total sales – that’s two out of every three bottles sold in America.

Sales of Californian wines on the domestic market were up 4% last year to a record high of 417m gallons, with retail value rising 2.3% to US$14.3bn (WIC).  However, as we import more Californian wine into the UK, the proportion of US production sold on the domestic market is actually falling.

In 2000, 88.2% of Californian production went to US destinations, leaving just less than 12% for the international market.  However, by 2003 the share of Californian wines destined for the US had fallen to 84.5%.

It seems that the golden export opportunity created by the weakened US dollar has been too good for producers to miss.  "The export market has been important to us for a long time," says Bruce Cakebread of Cakebread Cellars.

"In recent times the export market has become more favourable because of the weak dollar situation, which creates an opportunity for various other markets to try our wines and have a better understanding of them."

Californian exports grew by an impressive 29% in volume last year reaching 96m gallons, while value rose by 17%, to US$643m in winery revenues (WIC).  The Blossom Hill brand was created for the UK market in order to capitalise on export opportunities.

Tom Scott, director of public relations at Diageo Chateau & Estate Wines, comments, "Export has always been an important opportunity for us, as you can see from the success of Blossom Hill in the UK."  The brand sold over 3m cases in the UK last year.

But an interesting pattern is emerging here: with domestic consumption rising and more and more Californian wine reaching the export market, it was only a matter of time before imports from other countries to the US were also on the up.

American wines currently make up 78.7% of sales on the US market, but this is set to change.  With a population in excess of 293m people the American market has vast potential and producers around the world have the US in their sights.

Following several high-profile Aus-American drinks industry mergers in the last few years, Australia is leading the invasion, with exports rocketing 64.4% by volume last year and 51.6% by value (ACNielsen).

Australia now holds a 6.6% share of the market – only 0.1% behind long-time import leader, Italy. 

Orlando Wyndham’s Jacob’s Creek brand is the most recent success story, having secured a listing with the marketleading WalMart chain, but the catalyst for the growth of Australian imports was the Yellow Tail brand, which grew by 67% last year to take fifth place in the US brand listings – the fastest selling non-US wine by a considerable margin.

South Africa is the other big story on the import scene, rising 41.6% in volume and 37.4% in value last year, although from a small base.  In a similar pattern to that seen in the UK market, French wines are faring less well against New World competition, and French imports actually fell by 15.5% in volume and 15.2% in value last year, now accounting for just under 2% of the total wine market.

Imports from Chile and Argentina also fell slightly, by 2.6% and 3.2% by volume respectively, with Chile dropping 4.7% by value (ACNielsen).  "Consumers are starting to switch away from French wines and towards Australian brands – they’re like Californian wines, they’re easier to understand and Fetzer’s Erik Jepson.

"The way these brands connect with consumers is easier for them to relate to.  I don’t know that imported wines are going to continue to grow as fast as they have, but I think we will continue to see wines from Australia taking share from France or Chile."

Other companies are taking a more proactive "if you can’t beat them, join them" approach, and Sutter Home is taking advantage of both the import and export sectors. 

As Paul Shelton of PLB, Sutter Home’s agent in the UK explains, "Sutter Home has been working on new initiatives to take advantage of the growth in Australian wines with a collaboration with Reynolds Wines Ltd from Orange, New South Wales, with the main emphasis on the Little Boomey brand."

Whereas Blossom Hill is number one American brand in the UK, with second and third places taken by wines from E&J Gallo, and Sutter out in front as America’s number one wine.  "Sutter Home represents 11.5% of the US market with sales of 10m cases," says Paul Shelton.

"White Zin itself sells more than 5m cases in its domestic market.  This makes Sutter Home the biggest wine brand in the US." 

Sutter Home’s growth has been supported by intensive marketing and it has several above-the-line campaigns involving national TV and press, and is heavily into events sponsorship, including the intriguingly named "Build a Better Burger" event, and involvement with breast cancer charities.

But are branded wines as important to American consumers as they are in the UK? "Probably even more so," comments Jepson.  "The private label business is very limited; virtually all of wine sales in the US are branded.

Consumers are loyal to a wardrobe of brands, typically four or five, that they generally buy, but they switch a lot between them.  It’s not like beer where they tend to have one brand that they always buy.

Wine is a beverage where people like to try different things from different producers."  The increasing competition from growing imports naturally has an effect on prices, and last year average bottle prices declined in all price segments, particularly for wines under US$6, and those over US$60, as discounting prompted the first decline at the very top end of the luxury wine segment in memory.

"The wine glut that affected the whole world hasn’t left the US immune," comments Jepson. "Competition has been heating up over the last few years. 

Brands that may have been priced a little higher or not promoted so much in the past are now being promoted more aggressively and prices of wines in general have come down slightly."

The US$3-5.99 price bracket declined slightly last year and yet it still accounts for 23.7% of market share by volume and 22% by value.  While the US$6-8.99 and US$9-11.99 price bands both dropped in value slightly, the US$12-14.99 band grew by 5% in value and 8.5% in volume, showing that more consumers are trading up to super premium wines (ACNielsen).

"These trends underscore the ongoing polarisation in Californian wine, between large and small wineries, which tend to operate at opposite ends of the market," says Vic Motto of Californiabased wine industry advisors the MKF group.

"Larger wineries specialise more in the popular-priced, high-volume, mass-marketed wines sold primarily through large chains, while smaller wineries tend to sell higher-priced premium wines through the broad market of smaller trade outlets in the US.

Slowly but surely this pattern of trading is transforming the wine distribution system, along with wineries’ sales and marketing approaches." 

So where does the future lie for American wine drinkers? As large producers increase export volumes, and international imports flood into the entry-point sector, the domestic market appears to be polarising with sales shifting to either the lower price brackets or the superpremium sector.

With consumption increasing at a steady rate, the US market certainly appears to be the one to watch over the coming years.

US wines in UK market

CALIFORNIAN wines made a massive impact on the UK trade last year with sales worth £447 million.  Year-to-date statistics from ACNielsen show a 27.4% growth versus a market average of 3.6%.

The USA climbed to third place in import volume and value behind only Australia and France, now holding as much as 13.5% of market share.  Now the biggest brand in the country, Blossom Hill’s sales are growing at an impressive 35.9% over 2003, now selling over 3.06 million cases annually.

Corbett Canyon also showed massive growth in 2003, admittedly from a small base, this brand now accounts for an amazing 1 sale in 20, following some particularly strong and successful promotional activity last year.

Although two of branded giant E&J Gallo’s labels hold second and third places in off-trade volume, they are in fact showing strongest growth in the on-trade – showing 85% growth in this sector overall and 81% growth in multiple pub groups (ACNielsen).

The on-trade certainly holds new possibilities for Californian wines, as the US currently stands at only 7th place in volume.  From this position of strength, the Wine Institute of California is now intending to clarify the concept of "Brand California" with the unveiling their benchmark wines on October 18th.

These 16 wines have been chosen from 330 entries to exemplify Californian wine and demonstrate the quality of wines available at different price points.