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The state of the California wine industry, from dual perspectives

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David Freed is a really smart guy. I respect him, so when I saw this Q&A with David, by Cyril Penn in winebusiness.com, naturally I read it.

The mark of a great interview is that it gets you thinking. A great interview requires a great interviewer, but not even the best interviewer can get blood from a stone. Fortunately, David is not a stone. He’s a good interviewee because he knows his stuff and is willing and able to talk in solid, direct language that reflects his long years in what my Texas uncle used to call the bidness.

When Cyril asked David, “What sort of deals have you been doing on vineyards?,” David said Napa and Sonoma, but significantly added, “But what’s the headline? We’re in Monterey and Paso.” That’s the mark of an experienced interviewee. He knows journalists are looking for “the headline,” and he gives it right out front. David explained that his company’s stake in the Central Coast is because “It’s an area that is right at the $12-$14 or $12-$15 price point and is very popular.”

Why would a Napa-based company with roots in the North Coast move into the Central Coast at a lower price point? Of course I don’t have to explain it to my savvy readers. That’s where the action is, in a country that’s poorer than it used to be. As David pointed out in the Q&A, demand for wines at these and even lower price points is so fierce, California producers are running out of grapes (a problem compounded by recent short crops, although the Sacramento Bee yesterday reported “the 2012 [California] wine grape crop is expected to reach 3.7 million tons. That amount would tie the second-largest crop ever,” which would help alleviate the shortage). I’ve never seen such demand for inexpensive wines in my life. It’s a challenge for producers, made tougher because consumers still want the same old same old: Cabernet Sauvignon and Chardonnay. Despite the increased plantings in Paso Robles for the former and Monterey for the latter, expect to see lots more California appellation Cabs and Chards coming from the Central Valley. They’ll be inexpensive–and they won’t be bad. Which is good for consumers.

David also predicted California’s share of the domestic market will decline. “I don’t see that California growers are going to be able to maintain their position going forward as a percentage of overall U.S. consumption” is how he put it. California wines accounted for 83% of all domestic wines in 2011, down from the 90% reported in 2005. And that downward trend seems likely to continue.

This will make it even harder for California wineries to battle it out, gain their share of the grapes that are available, and compete against other states and imports. I’ve wondered for years just what the expensive wines are going to do–say, $35 to $60. There are fantastic wines available in that segment, believe me, but they don’t have the cachet of the cult Cabs and Pinots. We’ve been through these worrisome periods before, like the early 1990s, during the dot-com collapse and at the height of the Recession in 2009-2010, and the worst never seems to happen. But we’re going into tremendously uncertain times. David Freed told Cyril he sees “two wine industries” in the near future: “the Top 30 – and everybody else.” The Top 30 will do okay. The cults will do okay (their deep pockets will float most of them for a while). It’s the thousands of wineries in the problematic middle that are going to have to work harder than ever to stay afloat.

  1. Let’s be careful. David implied that the California share of overall sales would decline, not that sales would decline. The decline in share is a function of lack of planting over the past 6-8 years, combined with substantial growth in overall consumer demand for wine.

    I agree that it’s a difficult market for many smaller and pricier wineries. But that has much to do with marketing, competition and the structure of distribution, rather than the overall forces of demand and supply David is referencing.

  2. David Freed says:

    Thanks Steve. Takes one smart guy to know another one!! Seems to me you have at least 30 years in the bidness!!

  3. David, yes, and I’m only 32!

  4. The price points are not the issue, it’s the margin. If you are a winery who sells a wine for $35 that you could sell for $15 and still make a profit you can finesse the tough times and still protect your price point. It’s not easy, but it is often done. That’s why there are always a lot of wineries in the middle.

  5. Another factor coming out of all of this is a lot of the wines in that $30-$60 have been snatched up by online “discount” companies like lot18.com, WTSO.com, invino.com, and have been made available for 30-60% off. During a time when money is tight, people have been turning to that “discounted” bottle now selling for $20 that used to sell for $50… While these online discount sites are probably just a temporary thing, selling off surplus… they might have changed the buying mentality of a lot of consumers out there… who in the long run, won’t want to pay more than $20 for a good bottle of wine.

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  1. Amuse Bouche « Edible Arts - [...] An interesting take on the future of California wine from Steve Heimoff. The short version—Central Coast is where the …

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