Wine in a flutter??

The industry is wringing its hands again, albeit, mostly the growers. Huge surpluses. Falling prices, unharvested winegrapes. Oh my!!! References to the days of 1985, 1992 and 2001 are bandied about to add resolution and clarity to our minds eye.

It seems to this observer, once again our attention is being drawn to a snapshot in time. Yes, we have an immediate problem. Yes, there is a hang-over from last years big crop. Yes, there is little room at the inn for the new crop and yes, this years crop is headed over the hill if not harvested soon.

But, in the big picture, there have been no appreciable plantings for nearly 6 years. Average yields are down and trending lower as wineries buy grapes by flavor and extended hang-time naturally reduce crops. Cultural practices, such as refined pruning, shoot thinning and bunch thinning are more widely implemented further reducing yield potential.

At the same time, demand continues to rise on a larger and larger consumption base at 5-6% per year, just as it has for the past 5 years. One can easily imagine a graph with a fairly static supply line with a very stable growth line in demand and see the lines cross.

On the supply side, bulk wine imports, competition from foreign producers and other supply sources are more variable than one might think. These factors are influenced by their local economies, the value of their currencies in world markets, changing taste and consumption patterns in developing markets and other macro issues beyond California's situation.

California wineries and winegrowers have done a terrific job of differentiating our product. Now we are looking at marketing challenges. Selling wine appeal to a younger crowd. Taking the snobbery out of its enjoyment. Lowering the alcohol content so one glass does not puts one over the .08 limit. These are real challenges requiring a different perspective and a willingness to invest a few points from the profit margin for the future.

Globalization, consolidation and vanilla-ization are underway in our industry. Market share is getting very expensive. The big players in this field are in a position to increase profit margins, slow growth and reduce costs. All very corporate goals and objectives which translate to shareholder value in the market.

Perhaps some of the alarm and the rhetoric is aimed at these goals. Perhaps, we will wake up in 2007 or 2008 and find we don't have enough grapes to go around. Recognizing any substantial increase in supply will be three years off-prices rise. Perhaps we see wineries doing whatever it takes to get supply and maintain shelf-space. Perhaps we repeat 1989, 1995 and ?. Who knows? But, some longer-term view is necessary when looking at where you are, where you were and where you might be. I argue in favor of that longer view.

Fear the self-anointed

Recently, the Lodi-Woodbridge winegrowers implemented a certification program for its members. The idea being that certification of its Members who employ the organizations long proscribed cultural practices would provide added value to its members and their customers. While the commission has done much to improve the district's quality, image and presence in the marketplace, this latest effort is off-the-mark.

Unfortunately, it appears the members have forgotten the business their in. While some of the Members are producing their own wines and the certification will assist their respective marketing efforts. The bulk of the acreage, and the large proportion of the wine volume will only benefit if the program is mandatory and the winegrape buyers mandate compliance and reward the growers for their additional efforts.

The large proportion of the annual production is utilized in large volume brands with California appellation or Lodi if we are lucky. For a Gallo or Constellation is extract value from this certification on their label, they have to guarantee all of the wine in the bottle was produced under the certificates requirements. Given the complexities of blending, flavoring, sourcing and input cost considerations, the value proposition will be difficult to understand and may tie their hands rather than provide value.

The certification process does assist local growers who bottle their own wines and want to add value for their customers, differentiate their product and gain credibility with their consumers. Towards that end, the Commission is to be applauded. However, it appears this is an effort to use the power and weight of the group to the benefit of a few.

I would remind the Commission they have an obligation to the majority of their producers and every action should be measured by the value it will impart on the majority and the district. This is particularly true in view of the limited resources available and the multiple priorities already in place. Administering this kind of program will be time consuming and costly. The resources needed to administer the program no longer available to market the area.

Back to the Future!

California wine industry is in a sea change. Industry consolidation, aging core consumers, improving world economies and complacency are fomenting major changes to the staid, high-brow, industry we have known and loved.

The industry is consolidating into several global players reminiscent of the current grocery industry. These mega-players have the power to command shelf space at the retail level, control distribution channels at the wholesale level and dictate price and terms at the supply level. As with many consolidated industries, choice and preference opportunities are sacrificed for economic and logistical advantages.

The "boomers" are aging and with their increasing wealth they tend to be drinking better but less. A potential benefit to the higher end players and potential disaster to the high-volume, value lines. Only now are the marketing departments embracing the next generation of consumers with their lack of reverence for all that was wine with new labels, packaging and age specific targeting. The newly launched Virgin Vines by Richard Branson a notable example of this change. Change will be slow and small, agile, producers with courage to adapt will be rewarded.

The changing world economy and the change in nations standings will alter the source, production and marketing of wines globally in radical and diverse ways. The rising fortunes of China, the changing tastes of Eastern Europe, aging of America and the rise in Latin America will alter the world of wine. We are not prepared. We lack products to meet these changing markets and their taste, packaging and distribution channels. The global players are not prepared for this and lack the ability and the focus needed to prospect these new landscapes. A wonderful opportunity for a small, innovative, nimble company?

Meanwhile back on the farm, in the vineyards and wineries of California and elsewhere, we are plodding along. Thankful for the rebound in our business cycle we are setting ourselves to repeat the mistakes of the past. Complacent in our past successes and current good fortune and riding the wave of 5000 years of wine history, we "dogged another bullet", totally unaware the actual game we think we are playing may no longer be governed by the same rules.

The cumulative impact of these changes is opportunity. With the global giants providing a safe ceiling in the marketplace and their focus on market share and profit margins, there exits a great void for an established player or a rising upstart to enter the market and establish new channels, new brands, new products and blends and meet the growing needs of, as yet , untapped and little understood markets

Get our heads out of the Sand!

Reading the news reports, we are getting sprains from slapping ourselves on the back for the recovery in the wine industry. Touting our improved quality and consumer preference for California wines as proof positive the wineries are back on track and the future looks bright.

These are scary times, for it occurs to this observer, little has been learned of the globalization of wine and that sets us up for a future fall. While quality is always improving, pricing has been static and winery costs have risen, the real hero in this recovery has been the value of the dollar versus our principal competitors.

Nearly all of the vaunted increase in exports has been due to the fallen dollar. Domestic improvement has resulted from the Australian and the European wine suddenly being 20-30 percent more expensive without any substantial increase in the value proposition. US consumers are very aware of the value proposition and appear to shop wine with their head and pocketbook as well as their pallete.

Just as the Aussies were arrogant and brash in their assault on America, they have been left injured and hurt from the dollars movement. We need to recognize and weigh the impact of this on our industry and look around to see how we can take advantage of this anamoly while it is here and develop a plan to carry us through the pain and dislocation that is sure to happen when the dollar's value rises again.

Time is running out.

Pour it on!

Lodi already is big in producing premium varietals for the value and premium segments of the market. Building new brands around winegrapes sourced in the District is a critical brick in the foundation of our future.

After years of quality improvements, grower education, the elimination of some growers reluctant to change, and even the death of some die-hards, Lodi-Woodbridge is starting to reap the potential rewards. While the pain of change during the past few years has had some of us shaking our heads and wondering how it pays to compete with Napa and Sonoma.

The reality is Napa and Sonoma can't put a great tasting wine at an affordable price on all the American tables that want one. Lodi-Woodbridge cannot do that either. Finding our place is critical to the future.

At some quality point, together with a quantity and price point, Lodi-Woodbridge will flourish. Finding that place first will pay handsomely to the first growers to reach this optimum point.

That is our challenge. I think we are up to it.

P

SARS affecting the Wine Industry?

No, not the deadly Asian pathogen, but the dreaded corporate Strategic Asset Re-allocation Syndrome.

Infection is inevitable beginning with the largest, publicly held wine companies and ultimately affecting nearly all of us. The initial symptons are the business analysts and accountants, responding to shareholder concerns or pressure begin talking in acronyms like ROI, ROA, IRR. The dreaded diagnosis generally comes back that our Return on Assets is abysmal. Our Return on Invested capital is below peer group and our cash flow stinks. Couple that with an improving outlook, sales growth, advertising getting traction, new packaging and distribution opportunities and you have a full fledged case of SARS.

Generally the cure begins with shedding slow growing or limited brands through sale or discontinuation. These "cats and dogs" fill valuable voids in the needs of our customers in the good times and drain valuable scarce resources in poorer times. Next comes a comprehensive review of all of the brands and their structure and opportunities in the market place. Again, those with limited growth potential, has-beens or never-will-bees are shed like last years grape must. Some are sold, others are traded and still others are discontinued and show up at the dollar store as a close out.

Finally, the analysts bring up the "brick and mortar". This is a tough one becaue it is hard to quantify the value a winery obtains from owning vineyards, wineries, visitor centers, gift shops and associated assets. We know there is lots of cash tied up in these assets and we know debt associated with them is a drain on the cashflow. But, these are the assets which we fall in love with and find ourselves can't living without. Eventually, the "bean-counters" make their sale and these assets are put on the block to be sold and the syndrome has run its course.

In the end, understanding what business we are in is a very helpful thought process. We make wine, we sell wine. We don't need vineyards, wineries, etc., to do that. The concept of the "virtual winery" is grasped anew and with it the infection is cured until next time.

Once more we have stronger, more nimble players ready to tackle new opportunities. We have a cadre of new-comers, ready, willing and eager to challenge the industry to new heights and we have some who have exited the industry. And like any established industry we have a few who have watched from the sidlines content to observe the game and avoid the risks of play.

What a great industry.

It's in the Wind!

The strong winds of May have reshaped the wine landscape. Crops are maturing more rapidly than normal. The industry is dealing with change. New brands are taking hold. New ventures are being formed and there is an excitement coupled with the fear and trepidation of the last few years.

Values are strengthening, both for the grapes and wine and the underlying real estate as well. Sales are still elusive and certain varieties of grapes have a difficult row to hoe for the foreseeable future.

Chardonnay, zinfandel, white zinfandel, savignon blanc and even the lowly french colombard are showing good signs for improvement. The dog continues to be cabernet sauvignon.

Lets drink some more...Try one of the new cans of wine. perhaps a screwcap collection is in order. Embrace the change.