The Future of the Global Wine Industry | Morss Global Finance

by Elliott R. Morss, Ph.D.

Introduction

Over the last 30 years, dramatic changes in the wine industry have occured. From being almost completely domiciled in four European countries (France, Italy, Spain, and Germany), it has spread worldwide to include the US, Australia, Argentina, New Zealand, South Africa, Chile and yes, China (7^thlargest producer in 2011).

What changes can we expect in the next decade? The globalization of information is leading to changes affecting all industries. These changes include consolidation, specialization, and new production methods. These changes are affecting the wine industry as described below.

Consolidation

In wine, as with other alcoholic beverages, there are large economies of scale to be realized in marketing and distribution. As a consequence, there has been tremendous consolidation.

Table 1 provides just a hint on the enormity of the consolidations underway. Constellation is the largest wine company in the world, with Wine Business Monthly estimating that it sold 102 million cases globally (E&J Gallo global sales are estimated at 80 million). Note the number of brands each company has. In addition to brands, Bronco claims to have 585 wine partners. Fred Franzia of Bronco says they have more than 50 square miles (32,000 acres) of vineyards planted. Much of its business involves selling grapes to others. 

Table 1. – Leading Wine Companies and Their Brands

Source: Wine Business Monthly

But the consolidation goes beyond what is indicated above. Ste. Michelle is owned by Altria, the second largest tobacco company in the world (behind China National). And the 8^thlargest wine company is owned by Diageo, the largest alcoholic beverage company in the world.

Specialization: Grape Farmer – Wine Maker – Wine Seller

Merriam Webster defines a vintner as a wine maker/merchant. That is how it used to be: wine makers usually sold the wines they made. In fact, it used to be that the grape farmer made the wine and sold it. No more. The consolidation described above has taken place largely because of the tremendous economies of scale in marketing and distribution. But specialization is also taking place in growing grapes and making wine.

So today wine entrepreneurs are thinking – why is grape farming any different than any other form of farming? Traditionally, grape farmers have been the vintners: they have grown grapes, made their wines and sold them. But why does this have to be? Why should a grape farmer know how to make good wine better than anyone else? So wine entrepreneurs are developing their own cadre of wine makers to scour the globe looking for grapes to make good wine. And to sell the wines they make? They buy up well-known wine brands and develop new ones.

This can perhaps best be seen in looking at what Fred Franzia of Bronco and John Casella of Yellowtail have done. Much of what follows comes from a great book by George Taber. Both are true revolutionaries, but their approaches are very different. Franzia gained notoriety via his Two-Buck Chuck (Charles Shaw) wines sold through Trader Joe’s. And Casella’s Yellowtail grew so rapidly that some estimate it now constitutes 50% of US wine imports from Australia. Their differences: Consider first grape growing. As indicated above, Franzia has 32,000 acres in wine growing. How does he use these grapes? Some he sells off as grapes/grape juice, some he makes into bulk wines (and sells off), and some he uses for his own wines. Here is a Franzia quote from Taber’s book:

“People don’t understand that we’re both buyers and sellers…. We buy grapes, and we buy wine. But we also sell grapes, and sell wines. We try to sell for more than we pay. We buy at $4 and sell at $6. And we do the same thing every day.” But with all his grape growing, Franzia says his wines only use 55-60% of his own grapes. He adds that his wines will never be 100% from his own grapes.

While Franzia is a grape farmer, Casella does very little grape growing. According to Taber, Casella grows only 5% of the grapes that go into his wines. The rest come from 650 different sources. He has 4 staffers that do nothing but buy grapes for him.

When it comes to making wine, Franzia and Casella are similar. Franzia has a team led by Ed Moody while Casella has a team of 11 wine makers headed by Randy Herron. And they make wines people like. A famous example is a Charles Shaw Chardonnay selling for $1.99 winning the 2007 California State Fair blind tasting wine contest against 350 other contestants where the average price was $28.50.

Casella, realizing that US consumers were used to relatively sweet wines, had his winemakers develop sweeter wines for the US market. Critics say the Yellowtail wines are getting better. And Casella has developed a new “Reserve” line of wines that are aged in oak with suppliers from France and the US.

Neither of them has any problem selling their wines through supermarkets, drug stores, whatever. Charles Shaw is sold exclusively at Trader Joe’s but his other 110+ brands can be found in any retail outlet with a wine license. And Yellowtail can also be found just about anywhere, including Costco.

What do these two revolutionaries tell us? No need to be a grape farmer – Casella is not. If you have good wine makers, they will find grapes to make good wines. Even though Franzia is a grape farmer, he (or more specifically his wine makers) buys grapes from others for his wines. And rest assured, these revolutionaries are not alone. According to Wine Business Monthly, Castle Rock ranked as the 25^thlargest wine seller in the US, “owns no vineyard and no winery. And then we have 90+ Cellars. It buys excess wines with a 90+ ratings from wineries that produce them.

So what does all say about the future of the wine industry? Further specialization. The French regions with families that grow their own grapes to make their own wines will continue as long as people want to buy prestigious, expensive brands. But the future is not with them. The future? Wine makers scour the globe for grapes to make wines that appeal to different palates. “Terroir” will take on an entirely new meaning. Huge marketing/distribution companies will sell the resulting products wherever they can.

Blending

There is another growing phenomenon worth watching. It is becoming increasingly apparent that few people like wines from a single grape. Blending, or making wines from more than one grape, has been around for a long time. Even Champagne, unless it is a Blanc de Blanc, contains at least one additional grape for coloring or flavoring. And the Côtes du Rhône region of France has been making very good and reasonably priced blends (usually including Grenache, Syrah, and Mourvèdre) for time immemorial.

So what can we expect? Well, wine makers will no longer tied to particular wine growing plots. Instead, wine makers will be instructed to find grapes anywhere they can to make wines that taste good. We can expect more blending.

Conclusions

Assuming I am right about the future, what do we think? I am excited. I see more wine flavors and lower prices. And while I am quite content with the excellent Yellowtail Reserves (Pinot Grigio, Chardonnay, Cabernet Sauvignon, Merlot, and Shiraz) at $9, I am always interested in trying something new – grapes I don’t know and blends still to be discovered.

It will be very easy to become overwhelmed by the number of brands being marketed – from Table 1, I count 340+ from just the top six wine companies. So what is one to do when visiting the drug store, supermarket, and/or liquor store to buy wine? Drug stores and supermarkets sell wines at low prices, so if you know what you want – fine! But in liquor stores or wine shops, try to find someone who is really knowledgeable and hard working (they have to be hardworking to stay ahead of the curve), and see what they come up with for you. And as I have suggested, have your own wine tastings at home.

Wine “futures” should be exciting!