US Demand for Wine Draws Growing Number of Imports

FILED APRIL 2, 2013

Dear Client:

The wine industry is constantly fluctuating between under supply and oversupply; just a few years ago every region in the world was in over supply. Today the industry has shifted "to balanced if not shortage of supply in most of those areas around the world," Steve Fredricks, president of Turrentine Wine Brokerage, recently told listeners at the Vibe 2013 Conference in Las Vegas. "There is growth, and we're moving to a point where growth is happening faster [and more] new brands are coming on board for us to supply.... We are going to see a continued push to increase price to ration that short supply."

STATE OF CALIFORNIA. After a short-to-balanced 2011 crop in California, "2012 was a huge rebound" with a record breaking harvest of just over 4 million tons. There are currently about 14 million gallons for sale in the state, which are largely controlled by bulk suppliers from the central coast, who were able to sell at a higher price last year.

In today's market "we have good demand, it's just trying to figure out what is the fair market price for the wine that is available," said Steve. In 2011 growers were rationing a very short supply, which resulted in increased price "and meant a lot of people backed out of the market. Now we're trying to reset price to a more healthy level and we've got a healthy demand in the marketplace for it."

The good news is that consumer demand is looking strong in the US. The bad news (for domestic wineries) is that other wine producing countries are taking note.

IMPORTS LOOKING TO THE US. Because the US market is so lucrative, "all these wine countries around the world are putting together brands to try to compete in the United States in the $10-$20 a bottle range." But that doesn't mean they will all be successful. They have the same challenges getting distribution as domestic wineries often do, in addition to added import barriers.

So which countries are competing where? Italian wine companies, for example, "are trying to capture the red wine blend" trend, while French and domestic companies are trying to bring in Grenache, Mourverdre and Syrah (GSM) blends from the South of France under $10 a bottle. Spanish regional groups are "working hard" to market their wines around the world. Domestic companies have also gone to Spain to search out Garnacha, Tempranillo or "just a red blend that is going to compete maybe on that sweet side," said Steve.

"Australia has been in a tough spot for a long time.... They only have really around the world the value business anymore. In the United States there were many value brands and really Yellow Tail took that all over." In 2013 "there are a lot of efforts to bring Australia back up to a higher price point." [See yesterday's issue for further reading .] California wineries are facing competition from Australian Chardonnay. "We're going to see Australians really try to get back some of the market share" they lost to California.

Not surprisingly, Argentina "is all about Malbec," and there is also some bottled Torrontes coming in. However, Argentina as a whole is a "difficult trading partner," due to the political climate that is affecting the economy. It's difficult to get inventory and logistics are a challenge. Looking forward, Steve says we should expect to see "a rebound in quality" across the spectrum, and more Argentinean companies tapping into that $10-$20 wine segment in the US.

New Zealand "is increasing its efforts to market high-end Pinot Noir" in the US. Although supply for Pinot Noir under $10 is a bit tight in California, Steve notes that Constellation wouldn't have paid $160 million for Mark West unless it was confident in future growth. Meanwhile, $10-$20 California Pinot Noir "has seen a huge increase in supply. A lot of marketing companies and brands have really been throttling back their growth of Pinot Noir because there just hasn't been supply for them to take care of their national accounts." But now on-premise establishments can expect to see more of brands like J. Lohr, La Crema and Bogle.

Chile, meanwhile, "is very adept at trading around the world.... It's very easy to get wine out of Chile." The value market will have varietals for sell around the world and "pretty consistent pricing" for the remaining 2012 and 2013 wines, said Steve. "They are going to be the leader in terms of where wines in the US are marketed without varietal, without vintage, without appellation. Chile has an opportunity to be a big source for those wines going forward." Their value Cabernet is especially competitive against California wineries.

REGIONAL WINES FACING COMPETITION. Red blends "have been a huge category in terms of California. People are trying to drive and create brands. In 2011 we received calls every day from people trying to create" the next Menage a Trois, said Steve. Then 2012 brought a large supply for many of the varieties in red blends (Syrah, Petite Syrah and especially Zinfandel), which further set the stage for growth.

Moving forward we should expect to see increased offerings of red blends across the price spectrum and sweetness level - "from Prisoner on down to the sweet red blends that sell for $5 and less." The same thing is true for imports.

"I'm not sure that these red blends are really great for the California wine industry as a whole or any regional wineries," he continued. "A lot of them are marketed without appellation and some without vintage and without variety." That means wineries can source grapes from anywhere in the world. "Now that's great to keep a consistent price on it, but it certainly doesn't drive authenticity, it certainly doesn't drive a sense of place." Steve notes that this could hurt on-premise establishments if wineries lose their appellation and ability to drive a value proposition, which ultimately leads to lower prices.

OUR THOUGHTS. It's an ever-changing market in the US. You've got wineries tapping into trends sweet craze and red blends, and the average US consumer trading up and drinking more wine than ever before. It makes sense that imports want a piece. Our only concern is that the wine industry will commoditize itself by turning away from AVAs. Are you concerned about imports flooding the US market? Do you think red blends are bad for the industry? Email me at emily@winespiritsdaily.com

SCOTCH EXPORTS DROP, VALUE INCREASES IN 2012

Rising demand for Scotch whisky drove up the value of exports for the eighth consecutive year in 2012, according to the Scotch Whisky Association (SWA). Export sales hit $6.5 billion, representing a 1% increase, but volumes dropped 5% (to 1.2 billion bottles). The SWA contends this combination reflects "increased demand for more expensive, premium Blended Scotch Whisky and the growing popularity of Single Malts."

The US remains the No. 1 market by value for Scotch. Sales were up 16% last year to just over $1 billion. "Demand from the USA is expected to increase as consumer confidence grows and many people trade up to premium brands," said a statement from the SWA.

"There is confidence in the future of the industry, illustrated by the £2 billion [$3 billion USD] capital investment that Scotch Whisky producers have committed over the next three to four years. New distilleries have opened and older ones brought back to use to meet rising demand," says Gavin Hewitt, chief executive of the SWA.

S. CAROLINA BILL THREATENS SMALL LIQUOR CHAINS

A bill proposed in the South Carolina legislature has local liquor store owners worried they may be facing a battle against major retailers. The bill would increases the number of liquor permits per business from three to seven, reports The State.

Total Wine is the muscle behind this bill claiming the current laws are unfair. "Frankly, the limit is protectionism, and protectionism is bad," says David Trone, president of Total Wine. "Competition is good."

Total Wine has a South Carolina lobbyist and is a regular contributor to politicians in the state. And if the bill passes, David says Total Wine plans to open four more stores soon after.

Local liquor store owner Ed Andino worries he will be driven out of business if the bill passes. "They have the budget to invest in one product what I have invested in my entire inventory," he said. "This bill would cost me everything."

This situation doesn't sound all too different from the one in Dallas. Recall Dallas-based Centennial Beverage was basically run out of the business when local alcohol laws increased competition and Spec's and Total Wine moved into the area. Shortly thereafter Centennial, which once owned 70 stores, filed for bankruptcy and downsized to about 6.

WSD BRIEFS:

GEYSER PEAK RELEASES WHITE BLEND. Accolade Wines North America has expanded its Geyser Peak line to include Uncensored white blend. Uncensored white is a combination of viognier, riesling, chenin blanc, chardonnay and sauvignon blanc. Retailing for $14, Uncensored White is the companion white blend to Geyser Peak's Uncensored red blend the company released in October.

CECCHETTI HAS RECORD 2012. Cecchetti Wine Company has delivered double-digit growth every year since its inception in 2006, and 2012 was no different. The company announced today that in 2012 it sold a record 340,000 cases wine in 2012, in conjunction with a 30% increase in sales volume. Backhouse brand continued to be the No. 1 fastest growing in the company's portfolio, which grew 93% to 62,000 cases. Line 39 was next with a 30% increase to 162,000 cases. And the company's largest brand Redtree grew 12% to 162,000 cases. With a strong start to 2013, Cecchetti says it is on track to hit 400,000 cases this year.

AVIATION GIN ON THE FAST TRACK FOR GROWTH. Oregon-based House Spirits Distillery has partnered with Kimpton Hotels & Restaurants to feature its flagship Aviation American Gin as the only American craft gin on the menu. The partnership will extnd to 49 Kimpton properties this spring and accelerating the brand's already rapid national growth. Recall in February House Spirits signed a distribution agreement with Southern Wine & Spirits, expanding Aviation throughout the US.

GLAZER'S APPOINTS SENIOR VP SALES DMH DIVISION IN LA. Effective April 15, Sean Eckhardt will step into the role of senior vp of sales for the DMH division, Louisiana for Glazer's. He will lead the sales functions for the DMH division and be responsible for the topline performance, driving customer relationships and enhancing value-added services. Sean has previously held various positions at Schenk Company and Copeland's Restaurants, but his most recent position was vp sales with Florida Distributing Company.

Until tomorrow, Emily

"A hot dog at the ballgame beats roast beef at the Ritz."
- Humphrey Bogart

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