OREGON GRAPE SALES REACH NEW HIGH

Research from Oregon State University reveals that winegrape sales reached a new high in 2006, marking the biggest sales increase and largest jump in production in seven years. Oregon winegrape sales rose 28% to $46.7 million, up from 18.5% in 2005.

The report cites new vineyards (which have tripled in the past decade) and growing global demand as reasons for Oregon’s success last year.

Pinot Noir remains the most popular varietal as grape production in the northern Willamette Valley fueled much of the growth.

CALIFORNIA DECLARED A SOVEREIGN NATION

Led by the California Association of Winegrape Growers (CAWG), California growers launched a light-hearted consumer marketing campaign at a press event in New York yesterday. CAWG president Karen Ross declared California’s independence as a sovereign wine country alongside France, Italy and Spain as the world’s leading wine-producing countries. California’s six major regional AVAs (North Coast, Sierra
Foothills, San Joaquin Valley, Sacramento Valley, Central Coast, and South Coast) serve as ‘states.’ The ‘nation’s’ credo reads ‘One Nation Under Vines’ where the winegrape growers are the ‘ambassadors.’ Their ambassadorial duties include “highlighting California's growing conditions, experience and sustainable growing practices make a difference in creating world-class wines.”

“California's winegrowers declared the state an independent country where life is grape, citizens have the right to bear vines and Arnold Schwarzenegger can be president,” said the news release.

During the press event, Karen read the new ‘nation’s’ Declaration of Independence:

“We, California's winegrape growers, hold these truths to be self-evident: that California produces some of the best-tasting and highest quality winegrapes in the world; that California boasts an unrivaled diversity of climates and soils; that California is a leader in sustainable winegrape growing practices and innovation; and that life, liberty and the pursuit of great wine is the cornerstone of our society.”

The group’s first-ever promotional campaign will cost around $250,000 and was voluntarily funded by grower donations. Visit www.onenationundervines.com for more information.

RACECAR DRIVER DARIO FRANCHITII

won the Indianapolis 500 on Sunday much to the delight of his sponsor, Beam Global’s Candian Club Whiskey.

In 2007, Canadian Club has grown double-digits in the two core racing markets (Indiana and Florida), illustrating how Canadian Club’s sponsorship has helped build awareness and brand loyalty.

JUST HALF OF U.S. CONSUMER PRODUCTS GOODS COMPANY EXECUTIVES

say they are optimistic about the U.S. economy over the next 12 months, a decline from 72% last quarter, according to PricewaterhouseCoopers’ "Retail & Consumer Industry Practice's Consumer Products Barometer." John Maxwell, leader of the report, stated that execs are concerned about the “possible impact of inflationary pressures on our economy.”

In spite of reduced expectations for the U.S. economy, though, 67% of execs say they have an overall positive view of the global economy.

TESCO CHIEF TO GAIN HUGE INCENTIVES

Tesco chief Sir Terry Leahy will reportedly receive a whopping 2.5 million shares (worth about $23 million) if the supermarket chain successfully expands into the U.S. The first Fresh and Easy concept store is expected to enter our shores in the coming months.

INDIA PLANS TO ACCEPT

EU and US demands to reduce alcohol tariffs as high as 550%, reports Bloomberg. Officials say they have begun the process of realigning the country’s duty structure, and plan to have it done in the next month before the WTO dispute panel gets involved. They’ve said something like this before, so we’ll see what actually happens.

NEW ZEALAND FARMERS WORRY OVER SUPPLY

New Zealand’s grape harvest grew 11% in 2007, but the wine industry says its will likely not meet demand and will have to increase prices. NZ exports rose 31% in the 10 months ending April 30 and members of the New Zealand Winegrowers say a bigger harvest just won’t cut it.

A strong dollar also has New Zealand exporters worrying about the continued success of their brands, particularly in the U.S. which consumes about 25% of New Zealand wine.

MEXICAN FARMERS ABANDON AGAVE FOR CORN

An oversupply of agave plants and a rise in U.S. ethanol demands are leading many Mexican farmers to burn their agave fields in favor of corn, according to Reutuers. The switch to corn will eventually lead to an agave scarcity and therefore a tequila shortage in the coming years. Officials are predicting that farmers will plants between 25% and 35% less agave this year. Disease has also taken its toll and many in the industry believe that by 2008 much of the crop will be sick.

While tequila has grown, the oversupply of agave has driven prices way down. But after President Bush announced plans to use corn-based fuel as a gasoline alternative, prices went up and Mexican farmers jumped on board. The ever growing demand for ethanol led farmers in the U.S. to plant 15% more acres of corn this year from 2006, but anticipated bad weather will likely mean less corn and higher prices.

FLORIDA STATE CLEARS THE CONFUSION

After the Florida state legislature ended earlier this month without passing a direct wine shipping bill, the industry was gray on whether shipping to consumers was still legal. Adding to the confusion, the Florida Department of Business and Professional Regulation had taken down their website which contained guidelines for out-of-state shippers on how to ship alcohol into the state.

Last Friday the DBPR put the direct shipping website back up and confirmed there has been no change of policy. According to Ship Compliant, wineries can continue to ship to Florida consumers as long as they remain within the law.

ABSOLUT KICKS OLD CAMPAIGN TO THE CURB

It’s not often that we write about Absolut on any subject other than speculation surrounding its imminent acquisition, but here we go. As most of you likely know, Absolut has put its old “Absolutely Perfection” campaign to bed in exchange for a more updated advertising initiative.

Faced with a whole host of new super-premium and premium vodka brands, Absolut has switched to a new campaign entitled “In an Absolut World” that portrays a world as idyllic as Absolut vodka. Absolut plans to move beyond print advertising to incorporate digital, outdoor and TV as well in hopes that a fresh ad campaign will help bring in new consumers. In addition, Absolut will offer annual flavors that include this summer’s offering, Absolut New Orleans.

Jeremy Mullman at Adage.com has a great article if you are looking for some more in-depth coverage of Absolut’s new marketing initiative.

TEXAS RETAILERS LEVEL PLAYING FIELD

Texas Gov. Rick Perry signed a bill on Friday barring wine and spirits package stores from shipping to consumers and on-premise accounts anywhere in the state, effective September 1. Under SB 1229, package stores will only be able to deliver in the counties where they are located.

We see this as a protective measure on the side of the package stores to keep the out-of-state retailers from entering Texas. The state is currently facing a lawsuit from the Specialty Wine Retailers Association who claims Texas is in violation of the Interstate Commerce Clause by not allowing out-of-state retailers to ship into the state. The new bill may render the out-of-state retailers lawsuit as moot since in-state package stores can no longer ship across county lines.

In May 2006, the TABC (Texas Alcohol Beverage Commission) agreed to a preliminary injunction that allows out-of-state retailers to ship directly to Texas residents. However, we think there is a good chance the judge will rule in favor of the TABC since the new bill essentially levels the playing field between in-state and out-of-state retailers. If the Commission wins the lawsuit, then the preliminary injunction will no longer be enforced.

As you may remember, Texas is one of three states (including Kansas and South Carolina) in the U.S. that has the unique fourth-tier system. Spirits wholesalers (RNDC and Glazer’s in Texas) are not allowed to deliver directly to on-premise accounts and must go through package stores instead, such as Twin Liquors and Spec’s. There is currently litigation to overthrow that practice, however, and from what we hear things are looking good for the wholesalers.

CAWG SUPPORTS IMMIGRATION REFORM

While some in the restaurant industry fear the immigration proposal could make hiring much more difficult, the California Association of Winegrape Growers (CAWG) is asking the U.S. Senate to support the reform.

If passed, CAWG believes SB 1348 would give a boost to agriculture by providing a “practical” guest worker program and a way for farm workers to become legal. The bill would also improve the H-2A visa program.

CAWG is encouraging the Senate to “move forward as quickly as possible” in passing the reform so growers can avoid the “dire situation...faced last year during harvest."

PERNOD “PRIORITIZES” STOLI AND ABSOLUT

Pernod chief Patrick Ricard said acquiring Stolichnaya and Absolut are the company’s top priorities for the time being. During a visit to China, Patrick remained mum at a briefing when asked how negotiations are going with Russian group SPI (owners of Stolichnaya).

However, Pernod’s managing director, Pierre Pringuet, wasn’t so tight lipped on the subject of Absolut. He told reporters that Pernod has made its buying “intentions clear” and are now waiting for the Swedes to decide.

Is the company aiming to acquire both vodka brands?

Aside from the briefing, Pierre told Reuters: "It's pretty clear that one of the vodkas would be the priority today.” He pointed out that Pernod must remain cautious, however, because “of course we're not going to come with a pile of debt. We must remain reasonable.”

When announcing Pernod’s first-half results in March, Patrick Ricard said the following in regards to Stoli and Absolut:

“Well, we have the financial means to put a bid on both. We feel there would not be any regulatory problems, but one or the other brand would be plenty for us.”

“I think we’ve shown since the creation that when we want to do something, we find the means and endow ourselves with the means to do so.”

In the beginning we felt Beam Global was the most likely candidate to acquire Absolut, but now we’re not quite sure.

SUPERVALU TO INCREASE PRIVATE LABELS

Supervalu chairman and CEO Jeff Noddle told shareholders at the company’s annual meeting that the company plans to expand it private-label offering. According to supermarketnews.com, Noddle said that 35% of shoppers’ baskets contain some private-label items, “so we have a large opportunity to drive sales with our own brands.” Will this include new private label wine brands? We’ll keep you posted.

Supervalu also announced plans to open 25 to 30 new stores in its next fiscal year and do between 100 and 110 major remodels of existing stores.

RUM SALES SLOW TO 2.8%

While we all know that the vodka category is currently the number one reigning spirits, rum and cordials are tied for second place according to food, drug and liquor scan data from the Nielsen Company.

Nevertheless, spirits growth is slowing and analysts say it will continue to slow in the coming years. Nielsen data shows that in the 52 weeks to April 2006, overall spirits sales grew 8.4%, but in the 52 weeks to April 2007 spirits was up only 2.9%. The same slowing trend also goes for rum.

While still growing, rum’s dollar volume growth has also dwindled from last year. In April 2006, rum sales increased 11%, but in April 2007 rum slowed to 2.8%, about the same level as the total spirits category. When it comes to flavored rums, spiced/coconut was the driver of growth (up 7.1% in April 2007). Nielsen points out that while other flavored rums contributed significantly to overall category spending, they are not performing as well as spiced rum.

Along with flavored rums, growth is also led by premium and ultra-premium brands. Rum brands priced between $7.00 - $12.99 created the most dollar volume for the category in April 2007. But like all other categories, high-end rum brands continued to grow from 2006 while value rum was down -2.8% in April 2007.

CANADIAN CLUB GOES WITH ENERGY BBDO

Beam Global has chosen Energy BBDO as the global agency for Canadian Club. Energy BBDO already covers a whole host of Beam products, including Jim Beam, Starbucks Coffee Liqueurs, Knob Creek Bourbon and DeKuyper Cordials.

Beam plans to up its Canadian Club advertising and promotional spend by double-digits.

U.S. ASKS WTO TO SETTLE DISPUTE WITH INDIA

The U.S. has asked the WTO to set up a panel to settle the tariff dispute with India. The country’s tariff rates on alcohol beverages imports range anywhere from 225% to 550% and is something the EU has fought since last year.

U.S. Trade Representative, Susan Schwab, stated that "the layers of customs duties India applies to U.S. products, in particular to wine and distilled spirits, are not in line with its WTO commitments."

India’s high tariffs have made it “nearly impossible” for Tennessee Whiskey and Bourbon to break through “one of the largest spirits markets in the world,” said Deborah Lamb of DISCUS.

What will actually come of the U.S. request remains to be seen. Last month the EU succeeded in getting the WTO to setup a dispute panel to determine the legality of India’s tariff system. An earlier attempt was blocked by India.

HOT NEW TRENDS IN WINE AND SPIRITS

Hispanics, baby-boomers and catchy new products are the way to drive new growth in today’s market, according to NABCA’s “Hot Trends” panel. Kaumil Gajrawala of UBS, Bump Williams of IRI and Anthony von Mandl of Mike’s Hard Lemonade shared their insight on how to make (more) money in this industry. Let’s take a look.

SUPPLIERS IGNORE BABY BOOMERS. “We expect this trend (wine and spirits share growth) to continue but at a declining rate.”

If this is true, what can wine and spirits do to continue driving trends? The baby-boomer demographic has been ignored by suppliers, says Kaumil, which could really end up hurting them in the future. In the next ten years, the over-50 age group will increase 22 million. This is huge considering boomers have more retirement wealth than any generation in history. So, what do they like? Wine companies benefit the most from the boomer segment, said Kaumil, because they are attracted to its healthy image. They also like simple, low-alcohol content beverages, which Kaumil reasoned would be perfect for Smirnoff Source.

“The income of affluent US household is growing faster than other segments due to high salaries of well educated workers, more two-big-paycheck families, and favorable tax policies.”

Another group to watch out for is the baby- boomer’s children, otherwise known as millennials (roughly 21-29 demographic.) According to Kaumil, beer is extremely focused on this group who value variety, the image of sophistication, a connection to the product and premiumization.

The kicker, though, lies in the Hispanic demographic which is set to double in next 20 years. Kaumil says that they’re wealthier and migrating all across the nation, not just South Texas or California. Hispanics are the youngest of all ethnic groups (average age is 28) and most brand loyal.

Hispanics want companies to market with them, not to them, and are attracted to flavored products, said Kaumil. High-end will also continue to grow.

RETAILERS WANT INNOVATION. Bump says that the spirits category is going to see a softening in the next couple of years, mainly due to a lessening number of millennials showing interest in the category and wine and craft beers taking share. As a result, Bump encourages the category to target boomers (sound familiar?)

Bump pointed out that negative turnout across US high-end dining isn’t helping anybody, and the industry would fair far better if a new restaurant trend would replace the former Outback craze.

With on-premise aside, retailers are looking for a number of qualities in a product. The most important things to retailers, said Bump, is organic products. Energy infused products is also “the kind of thing to get the retailer’s attention.” And of course, any product that makes consumers spend more money makes retailers happy, such as something that drives cross promotion or brings multi-demographic appeal.

Bump suggested co-partnering with people that are viewed as a competitor to create new, innovative brands.

Furthermore, retailers are looking at the high-end segment as it becomes an increasingly popular with consumers. According to Bump, they’re not as willing “to put a cheap wine on my shelves when high-end is where the growth is at.”

The top five hot spirits brands that succeeded in bringing new consumers to retail stores: Jose Cuervo Cocktails, Captain Morgan rum, Sky vodka, Smirnoff vodka and Jagermeister High Energy. The top three wine brands include Barefoot Wines, Francis Coppola Wines and Sterling Vintners.

CONSUMERS CRAVE MORE FLAVOR. Anthony von Mandl took the stage with a supplier point of view. As creator of Mike’s Hard Lemonade, Anthony told the crowd that his company’s goal was to continuously redefine the specialty beverage category. Surprisingly to some, the average consumer age for the FMB segment is 33 and includes many boomers as well. Like Kaumil and Bump, Anthony believe boomers are a very important demographic.

“In the near future I think you’re going to see a whole class of products for boomers...after spending their lives on kids, all of a sudden they are free and they have money...they’re doing what they did in their early 20s.”

Society craves new kinds of food and therefore beverages (burger vs. sushi). Americans, said Anthony, are craving bolder tastes, spicier condiments and more bitter coffee. As a result, the alcohol beverage industry is going to have to roll out different kinds of innovative products to keep up with consumer demand. You’re already seeing this with the countless number of flavored vodkas and rums, along with emerging FMB brands.

“Basic and bland just doesn’t cut it anymore.”

Men have also changed in the past 5 years, according to Anthony, and are more willing to try things they may have viewed as effeminate in the past. With that comes the increased wiliness of men to drink flavored FMBs.

“Men look at beverages as a bridge to socializing with women and will typically take the woman’s choice.”

Anthony noted that trends such as these have helped bring about a “renewed interest in spirits but their range of products just isn’t going to satisfy all of the consumers’ needs.” Where wine is sometimes too serious and spirits is too hard, Mike’s is appropriate for all situations, says Anthony.

He also claims that consumers will start looking for smarter packaging that is conducive to the environment, such as tetra paks in place of bottles.

NAPA VALLEY GAINS GEOGRAPHIC STATUS IN EUROPE

A big victory yesterday for Napa winemakers. The European Union has granted Napa Valley a Geographic Indication (GI) status that bars wine brands from using the word “Napa” on a label whose grapes did not, indeed, come from Napa. This marks the first time the EU has given GI status to a nonmember.

Currently, there are two EU wine brands that use the Napa name: Clos du Napa from the UK and Varon de Napa in Spain. Nine other winemakers outside the EU currently use the Napa name and will be barred from exporting to the EU as a result.

Napa Valley Vintners have been campaigning Brussels since the summer of 2005 and were first turned down in November of that year.

REPUBLIC NATIONAL HAS PROMOTED

Russell Motz to executive vp of wine in Texas. In his new role, Russell will oversee all wine initiatives in the state.

VAN GOGH ADDS BANANA

Van Gogh vodka is releasing “banana” as its latest flavor, due to hit shelves early this summer.

B-F CONSIDERS NEW ADVERTISING CODE

According to the Courier-Journal, Brown-Forman is considering adopting stricter advertising guidelines after Beam Global announced a new policy earlier this month. The article noted that making the change for B-F may be more difficult because several of its key brands are geared towards a customer base of 21-29.

THE WHO PUTS OFF POLICY ON ALCOHOL UNTIL JAN 2008 MEETING

Yesterday we reported, based on several press reports, that the World Health Organization (WHO) had decided during their World Health Assembly this week that they would initiate a global alcohol ad campaign targeting alcohol abuse. In actuality, those press reports (and ours) were wrong. The WHO has actually decided nothing. Not sure how that confusion was created…possibly a leak by people with wishful thinking.

Regardless, you may be wondering why this is important. It’s important because whatever the WHO comes up with, as part of the United Nations, it generally can get picked up as policy in member countries. The WHO is very important to watch as a major policymaker on alcohol. That’s why seventeen beer, wine, and spirits producers have gotten together and recently created GAP, the Global Alcohol Producers Group, to act as a public face to engage the WHO.

The Swedes had been pressuring the Assembly to push for a tough anti-alcohol agenda, but one country refused to budge on moving forward on the issue. That country: Cuba.

"We tried to compromise with the countries that protested. We made changes and removed certain phrases. But Cuba wouldn't move an inch. They always came up with new objections," said Karin Nilsson-Kelly, an official at the Swedish Social Department, to Svenska Dagbladet.

Cuba is obviously a big rum-producing country, but its defense for blocking the measures quite reasonably pointed out that developing countries have much more pressing problems than alcohol, like TB, AIDS, malaria, and abject poverty.

What a double irony this is. Cuba acts as the voice of reason, while the Swedes of all people are pushing for tough alcohol measures, when they have among the worst records in the developed world for alcohol problems. That’s like Fidel being in charge of human rights.

TERLATO SIGNS NEW AD AGENCY

Terlato Wine Group has signed Grey New York agency to head brand strategy, advertising and marketing.

B-F EXEC BIDS ADIEU

Brown-Forman’s chief winery office, Steve Dorfman, is stepping down from his position as head of the company’s wine business.

“After spending 25 years with Fetzer and Brown-Forman, the time is right for me to explore new ventures in the wine industry,” said Steve.

Tim Nall will become general manager of B-F’s winery operation, effective June 1.

CORPORATE RESPONSIBILITY: BETTER BUSINESS OR A MORAL MUST

Another big feature of this year’s NABCA conference was the Social Responsibility panel headed by Alain Barbet (president and chief of Pernod USA), John Esposito president and chief of Bacardi USA) and moderated by Susan Molinari, chairwoman of the Century Council. Responsibility is such a huge issue in our industry and each speaker exemplified unique and important approaches to getting the message across.

In her opening comments, Susan told listeners that corporate responsibility is not only the right thing to do, but it helps create a more profitable business.

“It’s [social responsibility] good business,” she said. "The new generation of consumers wants to do good. What they want is to change the world. They want to make sure their purchases help the world.”

That feel good image applies to employees as well, she said. “People want to work in a company that’s making a difference.”

RESPONSIBILITY IS NOT A CATCH PHRASE. The first speaker to take the stage was Pernod’s Alain Barbet. His response to Susan’s comments was this: “I’m not sure that corporate responsibility to better business is the right benchmark.”

“Responsibility should not be a catch phrase. It should not be a way for us in the industry to look good. In my view responsibility is a state of mind,” he continued.

“It’s our moral obligation to make responsibility the fabric of our lives every minute of every day.”

He informed the audience that Pernod employees are required to alert the company if they receive a DWI or DUI, and that all employees’ driving records are monitored regularly.

Also, Pernod is currently in the final stages of developing a responsibility campaign.

“We have taken the high road in an industry that sometimes turns their heads to risks,” said Alain. “Responsibility isn’t about good business or about business at all. It’s the fabric of who we are as individuals, as human beings.”

INDUSTRY UNDER ATTACK. So while Alain argued that responsibility should be viewed as an avenue to better business, Bacardi’s John Esposito took an opposing view.

“Is corporate responsibility good business? Well I think it is, and if the world was a perfect place than Alain’s outlook would work. But the reality is the world is not perfect. There are special interest groups targeting this industry. My comments today will address how we as an industry need to respond.”

He told listeners to think back at what happened to the tobacco and fast food industries, for example, after regulators began targeting them. “I wonder who they’re coming after next?” he asked.

John’s solution? Self-regulation, he said, is the best way to avoid negative publicity, but it must come from a more aligned industry.

“As an industry today we are not aligned. We need to be more aligned.”

“There’s only a handful of people in the Century Council...we can do more...we need to come together not as competitors.”

John spoke out against the after effects of Beam Global’s and Sazerac’s recent marketing initiatives that voluntarily restrict advertising to audiences that are comprised of at least 75% adults. (DISCUS’s “Code of Compliance” currently holds a 70% standard.)

“Is it the 5% that makes the difference?” said John. “I’m not sure. But everyone needs to do what they think is right.”

He pointed out that many special interest groups are using the 5% gap as a way to “tear into other spirits companies.”

“What should have been a wonderful movement forward, became something that divided the industry. Is that good for us? I don’t think so.”

“I think it’s about survival. I think the industry is under attack,” he stated later in his speech.

John said he agrees with Alain that promoting social responsibility requires the entire corporation and remarked that no one at Bacardi is allowed to drive home after a company event.

At the end of his speech, John put up a slide featuring the following statement.

“Vision statement: Bacardi USA will be the #1 value-creating premium spirits company by 2011.”

REACTING TO INDUSTRY OFFENDERS. The Q/A was short and sweet, but the three speakers managed to address some very important, and rather controversial topics.

One issue repeatedly put forth in this industry is how to deal with offending brands. Both Alain and John made some interesting points, mainly centered on the importance of communication.

“I’m not sure if the example of Spykes is actually relevant but the fact is...at some point companies have to react if the rest of the world thinks it’s a terrible piece of advertising,” said Alain.

John used this as an opportunity to appeal to retailers and restaurants.

“If you continue to allow those people (non-compliant companies) to have shelf space and advertising space then you are at fault...A lot of times with an offender all you have to do is talk to them.”

An individual in the audience asked panelists where they draw the line in partnering with anti-alcohol groups.

“We think the programs that MADD are doing are right...I don’t think we’re aligning with people that hate the industry, but we’re aligning with people to make sure they have the facts and don’t go way overboard,” said John.

“We know there is a right message to give out to the public and in general they [the public] are very receptive...I don’t think these particular messages have made us suffer,” responded Alain. “In the past, this industry didn’t pay attention to regulators and that was the end (prohibition).”

Susan also agreed that partnering with MADD has given the industry a level of credibility.

BEER ALIGNING WITH SPIRITS. With so much talk about aligning the industry, what about coming together with the beer sector?

John: “It’s not about individual companies...I’m urging us to align as an industry. The Century Council would welcome the beer companies to join the organization."

Alain: “I think spirits and wines are really driving the responsibility message but I think we should be together...beer is getting there, but the spirits industry in particular has been very strong for many years for pushing the responsibility message...the beer side has not always been very credible in their responsibility message, so we encourage them to join us.”

Susan: “We also have to recognize that most people don’t differentiate between alcohol companies...if one company does something wrong it tars everyone...we’re certainly always looking for more partners.”

CONTEMPLATING THE THREE-TIER

After watching August, Paul and Richard earlier in the day, we dusted ourselves off and managed to grab a seat at the Three Tier Status Report panel at this year’s NABCA conference. Moderated by Rick Garza, deputy administrative director at the Washington State Liquor Control Board, the panel included a wholesaler, a retailer and NABCA representative. The overall message was as you would expect: wholesalers are a good thing, but we need to make some changes.

WHOLESALERS BRING EQUILIBRIUM. The first presenter at the podium was Brad Vassar, executive vp, general manager of Southern Wine & Spirits. You probably won’t believe this, but Brad is for wholesalers. Anyways, he spoke mainly about increasing wholesaler value and the ways in which wholesalers are a necessity.

The main focus for today’s wholesalers, says Brad, should be to ensure there is a place for them in the future. Compared to countries that don’t have a three-tier system, “wholesalers bring the most selection, the best prices and have more freedom in acquiring their products,” he said.

He warned that shipments from tasting rooms have increased $1 billion in sales and that “it will continue to grow.” Wineries are gaining higher margins by selling their brands directly at the full retail price, he said, and have adopted the attitude of, “‘Yeah, I want my consumers to have great access to my products, but on the other hand the money isn’t bad either.’”

“I challenge anyone to say they can distribute a product as efficiently as we [wholesalers] are,” said Brad. “Wholesalers and brokers have brought equilibrium to the business although it can always be better and it will change.”

“Upsetting the three-tier system would upset the existing delicate balance.”

He encouraged wholesalers to continue improving themselves in the eyes of the suppliers and retailers and to provide innovation in local markets. The most critical issue however, is underage drinking – even more than direct shipping litigation, according to Brad.

“We have to invest significantly behind that [underage drinking] because if there is anything that could bring this industry to a lower place, it would be issues with underage drinking.”

During the question and answer portion, someone asked Brad why wholesalers insist chaos would ensue if the three-tier system was brought down. Here is the gist of his reply:

“Smaller suppliers and smaller retailers would be disadvantaged as other retailers get larger. The system in the UK decreases the selection. If you’re going to do direct shipping you need to do it everywhere...on-premise and off-premise, and you’d have a tough time finding a supplier willing to do that.”

NEED TO LOOSEN REGULATIONS. Lucy Daniels, vice president of legal for Logan’s Roadhouse restaurant chain, told the audience that she supports the three-tier system but thinks some tweaking is in order.

“We agree with the three-tier system. We’d like to have a higher level of modernization that wasn’t even comprehended in the 1930’s, and we believe there will always be a three-tier system.”

Drawing back in history, she pointed out that suppliers used to be very abusive to retailers before the three-tier system was created, and that wholesalers were meant to serve as a buffer. However, she thinks modern society has outgrown many of the laws drafted in those days.

She expressed concern about the cost of alcoholic beverages and said the distributor tier can help make things cheaper.

“One of our main concerns is the safe sales of alcohol in restaurants and the business and economic impact...We would like to loosen the regulations so the purchase of these products are treated like our other restaurant purchases.”

JUSTIFY WHAT YOU’RE DOING. James Goldberg, NABCA general counsel started his speech with the following statement:

“We are dealing with a system that was drafted 70 some odd years ago and has had very little change since then... it’s like putting a square peg in a round hole. It just doesn’t fit.”

“If you don’t somehow explain and justify why you’re doing what you’re doing, you’re going to get into a lot of trouble legally.”

He claimed states are still trying to determine whether indirect discrimination is as illegal as direct discrimination in the Granholm case. Simply speaking, direct discrimination is allowing in-state wineries to ship directly to consumers while barring out-of-state wineries from shipping directly. Granholm ended that practice by determining that in-state and out-of-state wineries must be treated the same.

Indirect discrimination has to do with gallonage caps and face-to-face sales requirements. The plaintiffs in many direct shipping cases argue that volume caps and face-to-face sales are just another way to protect in-state wineries without blatantly doing so.

“This litigation is going to be considered in a number of areas...unless the states and the legislature steps back a minute and takes a look at their legislation until they recognize where their discrimination exists.”

BACARDI EXEC PASSES AWAY

We regret to report that Manuel Rubiralta Diaz, 63, executive president of Bacardi y Compañía, passed away unexpectedly yesterday in Bermuda. Manuel is survived by his wife and three children. Arrangements have not yet been made.

Manuel had been overseeing Bacardi’s commercial operations in Mexico since 2000.

TRADING UP HITS $700bn

Consumer trading up in the U.S. hit $720 billion in 2006, up from $670 billion in 2005, according to The Boston Consulting Group (BCG). In all, trading up accounted for 21% of the $3.5 trillion Americans spent in 2006.

Trading down also posted an improvement, accounting for 33% of spending in 2006 as compared to 32% in 2005 and 31% in 2004.

The study found that traditional middle market products are the ones suffering. The middle accounted for 46% of spending in 2006, compared with 48% in 2005 and 51% in 2004.

The top ten trading up retailers include Coach, Nordstrom, Limited Brands, Inc., Whole Foods Market Inc., Tiffany & Co., Neiman Marcus, Brinker International, Williams-Sonoma, Saks and Cheesecake Factory.

WE THREE KINGS: PAUL, RICHARD AND AUGUST

The theme of this year’s NABCA meeting in Palm Springs, CA was appropriately titled “Social Responsibility” and remained the foremost topic at hand throughout the week. Our first meeting to attend was the now infamous “Global Alcohol Strategies” panel where August Busch IV announced the company’s plans to pull Spykes from the shelves. It was quite a revelation indeed after A-B has endured weeks of criticism from regulation groups and other alcohol beverage insiders. We don’t want to get too involved in the issue, but let’s just say there are two very different points of view surrounding the controversy and both sides are not entirely unreasonable.

With that said, Paul Walsh and Richard Sands made up the rest of the panel, uniting the kings of beer, spirits and wine. Lynn Walding, NABCA president, moderated the panel and managed to throw some rather tough questions at the three chiefs.

ALCOHOL’S VERSION OF “RED CAMPAIGN.” But before the question/answer section, each leader made a presentation starting with Diageo ceo Paul Walsh. Paul focused mainly on social responsibility and challenged the industry to form an aligned global initiative much like Bono’s “Red Campaign.” Beer, wine and spirits together holding hands? It would surely be a sight to see.

Paul reiterated the idea that responsibility programs serve as growth drivers “if we implement them successfully.” What does a successful program meant to Paul? Well, let’s begin with the consumer. Paul claims that a growing trend among people is “the rise of ...the ‘ethical consumer.’” According to Diageo, consumers want to “feel good about the product they are consuming,” which translates to a “demand for leadership in responsible drinking” among alcohol beverage companies.

“And this is core to what responsibility means for us as an industry, and certainly for Diageo.”

Paul warned the audience that unless steps were taken to go above and beyond self-regulation, “those hostile to the industry will continue to characterize us” in a negative way.

“There is no room in such an environment for half-hearted measures, and no room either for those who want to selfishly coattail on the efforts of others.”

The answer, said Paul, lies in alignment. He encouraged the industry to come together to create a unified message on responsibility. But is this truly possible? Will beer, wine and spirits companies be able to effectively align in promoting a single message?

“It could be a global advertising campaign which we all of us fund – using our marketing expertise to drive awareness. It could be an initiative like Bono’s iconic ‘Red’ campaign. Or it might be a series of events around the planet to mark a Responsible Drinking Day. Frankly, the format of the initiative is immaterial. What is critical is that it is Global in character, substantial in execution, admirable, and impactful with all of our audiences...And that we do it together,” he said.

“CLASSIFICATION SHOULD REMAIN INTACT.” Next, August Busch IV (president and chief of Anheuser-Busch Companies) talked about the global vision for his company. We won’t go too deeply into his speech (you can get further coverage at www.beernet.com), but he did bring up some interesting points. A-B already has a spirits brand, Jekyll and Hyde, and has expressed a lot of interest in branching out to beverages other than beer, such as its Hansen energy drink. Nevertheless, August maintains that when it comes to classifying different types of alcohol, everything should remain intact.

“The different classification and rules for different types of products that have always existed should remain intact – flavored malt is still beer and flavored vodka is still vodka.”

SO, ABOUT A-B AND SPIRITS. During the question and answer portion, August remained rather tight-lipped over the possibility of taking on any future spirits brands.

“We have a little baby toe in the liquor business...We’re in a learning mode right now to understand routes to markets whether its control state or traditional systems. We also want to make sure that if we use traditional wholesalers it won’t distract them from beer.”

“Paul and Richard are in all three categories and know the cost advantage that I think I know, but don’t know for sure.”

In response to August, Paul Walsh said, “I would advise August not to come into the spirits category if he thinks he can make $0.03 a serving (laughter)...competition is good and we’re all here to serve the consumer as effectively and efficiently as we can.”

SAY ADO TO SPYKES. August slipped in an announcement that A-B will discontinue Spykes during the end of the question and answer portion. If you weren’t listening closely, you would have missed it. Here’s what he said:

“In no means was it [Spykes] intended for anyone under 21. We looked at the business and economics for the product and we’re going to take the product out of the marketplace.”

He also pointed out that “there are a lot of products out there that could be misinterpreted and we need to look at that.”

Afterwards, Paul used the opportunity to stress Smirnoff Source’s low abv and Richard came to A-B’s defense. One wonders if they knew August would make the announcement beforehand.

“We knew A-B wasn’t thinking about underage consumers. They were innovating in an interesting way and maybe it was perceived as such...the action August took really should be commended,” said Richard.

NO MESSING WITH THE THREE-TIER. Similar to August’s speech, Richard Sands (chairman and chief) gave an overview of Constellation in the global market. As the world’s largest premium wine company, Richard told listeners that the company’s “simple, decentralized structure allows our businesses to stay close to our markets and customers.” He also touched on recent developments such as the Vincor acquisition, Constellation International, Svedka vodka and Crown Imports, and declared that Constellation will continue investing in faster growing categories and geographies.

Wholesaler Support: While his speech was informative and articulate, Richard really shone during the question and answer part. One notable quote was made in reference to the three-tier. All three speakers agreed that the three-tier system is good and that they support it whole-heartedly, but Richard further expounded on the notion.

“If we start taking and messing with the three-tier system and control states and individual state control over alcohol, we’re going to create chaos. We’ve all learned how to adapt to the system and utilize the system to address consumers’ needs...social responsibility and the system we have are very important to take advantage of.”

Retailer Consolidation: When it comes to consolidation, the chairman of the world’s largest wine company declared that retailers will have the most consolidation in the future. He also said that “you’ll see more rapid consolidation in wine but I don’t think it’s eat or be eaten...there can be big players in each category and there can be small players. It goes back to the consumer. Consumers want choice.”

Critter Wines: Critter wines aren’t going anywhere, and if you ask Richard, that’s a good thing. Richard called critter wines “very positive. It demystifies wine because wine is the most esoteric and difficult to understand...the seasoned wine drinker isn’t offended by the fact that wine is being made available in this more approachable way, so you’re not losing that halo effect in ultra-premium wine.”

DO CONSUMERS OR COMPANIES DRIVE TRENDS? It’s like the chicken and the egg theory – which comes first? Do alcohol beverage companies jumpstart trends, or do new products serve as a way to meet consumer demand?

All three agreed it was the consumer who brings about new product trends, but both Paul and Richard had something interesting to say on the subject.

“I think its consumer driven. Sometimes the consumer can’t articulate their need as clearly because the product isn’t out there,” says Paul.

“The consumer wants a diversity of choice and the consumer, especially in the US, is very aspirational and wants a unique relationship with the alcohol beverage they want,” said Richard. “Mass brand is loosing its appeal and I imagine it’s why August wants to get into the imported specialty business.”

“American consumers are willing to pay a higher price for both quality in the bottle and perceived quality. There are very few markets in the world that offer that type of potential,” Richard continued.

What about brand loyalty when it comes to wine and spirits? Richard pointed out that while loyalty still stands, it’s a little different than, say, Coke or Pepsi.

“Consumers are drinking across category and brands serve as a function of their mood, but they’re still picking a particular set of brands...They have two or three spirits brands they trust...In ultra premium wines they don’t have loyalty to a brand but they’re choosing from a selected price set they can trust,” said Richard.

A NEW AD CAMPAIGN

to promote European wines on a global front is currently being planned by the European Agriculture Commissioner Mariann Fischer Boel. She says she will present the campaign to EU member states in early July.

LAST WEEK NABCA

issued a press release commending Beam Global and Sazerac for their new marketing policies that “further ensure their alcohol advertising and promotional activities are directed to adult audiences.”

VAN GOGH JOINS BLUEBERRY TREND

Like we reported last week, blueberry is the next “it” fruit flavor among suppliers. As the latest extension to join Van Gogh Vodka, Acai-Blueberry Vodka hit shelves in late April and retails for about $25 per 750-liter bottle.

IMMIGRATION PROPOSAL COULD HURT INDUSTRY

A new proposal to change existing immigration rules could have a noticeable effect on the industry. The bipartisan bill would require employers to verify electronically the legality of new employees, while raising the penalty for hiring illegal immigrants. According to NRN, the government’s electronic verification program “is badly flawed”

The proposal would also create a point system that favors highly educated workers, according to the publication, which would negatively affect many vineyard and restaurant workers.

WASHINGTON EXPANDS SUNDAY SALES

Washington Gov. Christine Gregoire signed a bill expanding Sunday liquor sales by an additional 29 stores and eliminating the 2003 spirits surcharge, according to DISCUS.

REPUBLIC NATIONAL HAS APPOINTED

Kurt Martin executive vp, of the southeast Texas market (Houston) effective May 7, 2007.

MOET HENNESSY BUYS CHINESE DISTILLERY

Moet Hennessy has acquired a 55% equity investment in Wen Jun Distillery, a premium white spirits company in China. Jiannanchun, the current owner of Wen Jun Distillery, holds the remaining 45%.

DIRECT WINE SALES UP 31%

Direct to consumer wine sales are reportedly growing at a rate three times faster than the industry as a whole thanks to wine clubs and loyalty programs. According to New Vine Logistics’ quarterly Index, direct consumer sales grew 31% in the first quarter of 2007 as compared to the previous year, and volume for wines priced over $30 dollars increased 68%.

TEXAS ABOLISHES RESIDENCY LAW

Texas has officially done away with its residency law which means Southern is likely to make a move. Previously, Texas law required owners of a distributorship (or 51% of the company) to live in a state for at least a year before obtaining a wholesaler license. That law is no longer applicable.

Where Glazer’s and Republic National were once the main wine and spirits wholesalers in the state, it looks like they’re going to have to make room for one more.

B-F ENDS J-V, GAINS TEQUILA

Brown-Forman has announced plans to end its j-v with the Orendain family and to assume full ownership of Don Eduardo super-premium tequila. As a part of the agreement, the Orendain family will repurchase all other Orendain trademarks that were once part of the j-v. Terms were not disclosed.

A little background: When the original j-v was launched in 1999, B-F and the Orendain family agreed to share ownership of Tequila Orendain de Jalisco and BFC Tequila Limited. Tequila Orendain de Jalisco produced the tequila and held the trademarks in Mexico, whle BFC Tequila Limited held the trademarks for all markets.

After B-F closed the Casa Herradura transaction earlier this year, the company decided to dissolve the j-v.

"Termination of the joint ventures with the Orendain Family was a natural step for both parties, given our purchase of Casa Herradura," said B-F president and chief Paul Varga.

“We believe Don Eduardo, which is still early in its development stage, has excellent potential to continue growing in the expanding super premium tequila category.”

SCOTCH DUE FOR A COMEBACK

We’ve been hearing a lot about Scotch lately as companies like Beam Global and Pernod look to rebuff their brand offerings. In recent years, the popularity of white spirits has outshone their darker colored companions as the cocktail trend becomes more prevalent in the U.S. As Nielsen reports, sales of Scotch were down 0.2% in the 52 weeks to January 13. Countries like China and India have been responsible for Scotch growth in recent years but perhaps that trend will soon resurface in the U.S.

“There is evidence that the 25-29 year olds have grown up quicker than previous generations as a result of 9/11, terrorist threats and two wars. As a result they have adopted so-called ‘mature products,’ such as premium scotch whiskey, earlier than usual,” said Ivan Menezes, president of Diageo North America, at the company’s annual investors conference last month.

If this is true, and millennials are choosing Scotch, than the category has a bright future indeed.

Pernod said yesterday it is looking to invest $54 million on a global Ballantine’s promotion, entitled “Leave an Impression,” in effort to replace Diageo’s J&B as the world’s second-largest Scotch brand. Ballantine’s is currently the world’s third largest Scotch whiskey brand by volume and second by value.

Beam Global has also expressed interest in re-strengthening its presence in the Scotch category – specifically through Teacher’s which is already doing quite well in India.

And of course there is the recent acquisition of Whyte & Mackay by India’s United Breweries, led by Vijay Mallya. W&M is the fourth largest Scotch producer behind Diageo, Pernod Ricard and William Grant.

According to FT, Vijay is "seriously considering" listing his international spirits business on the London Stock Exchange following the acquisition. Apparently, he plans on make more purchases in the Scotch industry and believes a listing would make it easier to raise capital.

"In the last few years, there have been concerns about whether vodka or other white spirits were actually eating into the Scotch whisky market, but that trend seems to have started fading away and the demand for Scotch whisky - particularly in the emerging economies - is coming back stronger than ever," Vijay was quoted saying in the FT.

Last year was a reportedly record year for Scotch whisky exports and distillers are seeing this as an opportunity to reposition Scotch. The winner of the race and its eventual outcome, of course, remains to be seen.

EVANS & TATE SOLD

Last week ANZ Bank bought a majority share in struggling Australian wine company, Evans & Tate, for $47.5 million. The deal comes almost two months after E&T rejected a $148.3 million bid from Yarraman Estates, a subsidiary of U.S.-based Yarraman Winery.

DISCUS APPOINTS PUBLIC RELATIONS DIRECTOR

DISCUS has appointed Ana Jovancicevic as its New York director of public relations. Ana will help oversee the Council’s public relations campaign that promotes the heritage, culture and style of distilled spirits and has over seven years of food and spirits experience.

THE PETER MONDAVI FAMILY

is planning a $3.5 million renovation of the historic Charles Krug estate. Considered the birthplace of Napa Valley wine, reconstruction of the Redwood Cellar and the Carriage House buildings will soon begin.

The renovation project is a way to reintroduce Charles Krug to the public. Charles Krug vineyards were recently replanted to focus on noble red Bordeaux varietals and now practice 100% organic and sustainable viticulture.

GAS PRICES HIT ALL-TIME HIGH

Fuel prices aren’t looking any prettier folks. In the week ending May 14, gas hit an all-time high leaping 4.9 cents per gallon to $3.103 per gallon, according to the U.S. Energy Information Administration. The previous average high ($3.07) took place in September 2005.

Gas prices have jumped more than 91 cents per gallon since the first week in February, but there’s some relief in sight. Gas futures for June delivery briefly hit a 9-month high before dropping more than five cents per gallon to settle at $2.30 per gallon, says MarketWatch.

INDIAN BILLIONAIRE CONFIRMS SCOTCH ACQUISITION

After months of speculation, denial and other claims, Indian billionaire Vijay Mallya’s company (United Brewers) has finally acquired Glasgow distiller Whyte & Mackay for $1.18 billion. Riding on the irony of two opposing factions, the Whyte & Mackay deal will serve as Vijay’s gateway into the Scottish whiskey industry.

It’s widely known that Vijay (a member of the Indian parliament) strongly opposes the fact that Indian spirits made from molasses are not labeled “whiskey” in the EU. As a sort of payback, Vijay has opposed the Scotch Whiskey Association’s effort to reduce the insanely high import taxes of up to 550% in India.

Whyte & Mackay claim the acquisition will actually benefit the Scottish whiskey market by drafting Vijay into their ranks. Only time will tell.

SHORT TERM ISSUES TO PLAGUE CONSTELLATION

Last week at the Goldman Sachs Investors Conference, Richard Sands told analysts that Australian wine prices are creeping upwards on reports of a lower 2007 grape harvest. However, UBS’s Kaumil Gajrawala warns against short term issues that could plague Constellation’s profitability.

While wine prices are indeed rising, along with demand from consumers, Kaumil warns that grape costs are up as well. So while the shrinking wine supply is great news for Australia, Kaumil says “margins could be under pressure near term because grape costs are already increasing.”

Other issues to watch out for in the near future:

1. A challenging UK market
2. Cannibalization and integration issues in the US
3. Retail pricing may stay below increasing grape costs

In the longer term, Kaumil maintains that a smaller wine supply will help improve profitability in the UK and benefit large producers like Constellation.

APRIL WINE SALES RISE ABOVE MARCH

IRI reports that in the four weeks to April 22, table wine sales were up 8.6% with domestics leading the way at 9% and imports growing 7.5%. When it comes to imports, sales from South Africa (53%), followed by New Zealand (32%) and Argentina (25%) remain the fastest growing.

Red wine continues to surge on the heels of recent health news, up 12.2% from the previous year, while white wine sales grew 7%. Since then, red wine sales have increased considerably from the four week period ending March 25, when red was up 9% and white stayed at 7.2%. Table wine in all has increased from the 7.2% sales growth in March.

The big winner in varietals continues to be – you guessed it – Pinot Noir. Pinot rose almost 30% followed by Pinot Grigio and Cabernet Sauvignon. But no matter what varietal consumers are buying, it better be expensive. Sales for ultra premium wine brands rose the highest at 25%.

SMIRNOFF GOES BLUE

Smirnoff is launching its latest flavor extension, Blueberry, this June. Kate Price, brand director, says, “With its sweet and tart texture, Blueberry raises our flavored portfolio to a whole new level.”

Blueberry has been a big hit among suppliers lately, with Pernod and Heaven Hill releasing Stoli Blueberri and Burnett’s Blueberry, for example, as everyone tries to keep up with consumers’ demand for change.

FRENCH EXPORTS TO THE U.S.

rose 13% in volume and 22% in sales last year as compared to 2005, according to Wines of France (a trade group). Volume for the regions of Bordeaux, Burgundy, Provence and Cotes du Rhone all experienced double digit gains.

SUPREME COURT DECISION “SHOULD SEND A POWERFUL MESSAGE.”

So by now most of us have heard about yesterday’s victory for three-tier crusaders when the Supreme Court refused to hear an appeal in a Virginia alcohol case. The Supreme Court’s refusal basically validated the 4th US Circuit Court of Appeals’ decision to limit the amount of wine an individual can bring into the state and the right of ABC stores to sell only Virginia wine. So, with that said, let’s take a look at what the trade groups had to say.

Craig Wolf, president and chief of the WSWA:

“This should send a powerful message to those seeking to dismantle smart state-based alcohol regulations—states retain virtually complete control over how to structure their alcohol sales and distribution systems, which are based largely on the wholesaler-centric model.”

“Today’s Supreme Court action ends years of litigation in Virginia, but it is perhaps even more relevant to regulators facing retail direct litigation in Texas, Michigan, New York— and potentially Illinois. The Supreme Court’s decision reaffirms the 4th Circuit’s ruling that nothing in Granholm supports the notion that states have an obligation under the Constitution to ensure that out-of-state retailers, no matter how geographically distant, have equal access to in-state retail markets.”

Craig Purser, president of the NBWA:

“America’s beer distributors are encouraged by the Supreme Court’s decision today, which confirms states’ rights under the 21st Amendment to regulate the distribution and sale of alcohol beverages. America has a very effective system in place. People in Utah do not feel the same way about alcohol as people in New York, and the regulatory system allows states the flexibility to deal with local circumstances.”

“The Supreme Court of the United States recognizes that the Fourth Circuit got it right in this matter.”

No other trade groups could be reached for comment.

MALIBU TARGETS HISPANICS

Malibu is partnering with Vital Marketing to create a national campaign targeted at Hispanics. The program will launch Memorial Day Weekend with activity throughout the summer in Miami, New York, Los Angeles, Dallas and Chicago.

ARBOR INVESTMENTS BUYS SAM’S

Arbor Investments has struck a deal to purchase 80% of Sam’s Wine and Spirits, a multi generational staple in the Chicago area. Brian Rosen (the owner’s grandson) retains a 20% stake and will serve as president of the company. Terms were not disclosed.