More wine is moving in and out of this country, which recently grabbed the distinction of being world’s largest wine market away from Europe.
U.S. exports, 90 percent from California, last year reached a new record of $1.39 billion in revenue for wineries, an increase of 21.7 percent from 2010, according to Gomberg Fredrikson & Associates and Wine Institute. Volume shipments grew 5.8 percent to 455.7 million liters, or 50.6 million 9-liter cases.
Imports grew 3.9 percent to 109.8 million cases, Mr. Fredrikson said. Including the equivalent of 25 million cases of wine, imports grew to more than 115 million cases last year and account for 32 percent of the volume of wine sold in the U.S.
Foreign producers and investors are interested in U.S. wineries and brands, often for the prestige or gaining a platform for U.S. distribution of portfolio brands. A key example of the latter is the April 2011 acquisition of Fetzer Vineyards of Hopland by publicly owned Viña Concha y Toro of Chile for $238 million.
The Business Journal asked experts set to be on the globalization panel at the 2012 Wine Industry Conference on April 18 about major factors affecting the success of U.S. wines abroad, imports and acquisitions of domestic producers by multinational companies. Panelists include Stephen Brauer, head of Treasury Wine Estate’s Beringer brand business unit; Eva Bertran, executive vice president of Freixenet USA, producer of Gloria Ferrer sparkling wine; David Hayman, senior vice president of operations, Diageo Chateau & Estate Wines; and Paul Hobbs of Paul Hobbs Wines, Paul Hobbs Imports and Paul Hobbs Consulting.
What are major considerations for California wines at popular and higher price tiers in competing in global markets?
Eva Bertran: The first consideration is if as a company you have an export mentality or you are looking at selling a few cases abroad. This is important because export sales need a long-term vision. It’s often complicated because of regulations, taxes, language and lack of knowledge of Californian wines. Finding suitable partners far away is never easy.
Too often, wineries jump into exporting when sales domestically slow down and pull out when sales go up. Export may not be as profitable in the short term, but if you have an export vision, it means that you see the advantage of diversifying your sales. It may provide potential growth when your domestic market is not growing.
Gloria Ferrer’s parent company, Freixenet Group, exports 80 percent of production. As you can imagine, this is what has made the Ferrer family leaders in Spain, but also among the top 10 wine groups in the world. If they would have concentrated in the Spanish market, their sales would be 2 million cases of Spanish cava and other wines vs. more than 10 million cases globally that they are selling now.
Once you are committed to export, you need to have a long-term strategy and allocate money and time.
The next steps are not that different from selling domestically: find a good partner, understand the market conditions, understand your competitors, educate trade and consumers.
Stephen Brauer: Our top priority is to take the time to do our research on the different markets, customers and channels — and then segment and resource against the most profitable brand, market, channel combinations accordingly.
David Hayman: We find that good U.S. wines are relatively competitive, although in the current environment, firming grape prices in California have begun to erode that competitive edge. Despite a poor 2011 harvest that has caused supply constraints across the state, Diageo continues to be highly focused on quality and delivering on consumer demand, with both iconic global trademarks and innovative lifestyle brands.
Paul Hobbs: Proliferation of brands, enhanced consumer awareness of global wines and styles and consolidation on all sides of the business all make for a more challenging global market. One key obstacle to the category globally is the perception among the newly affluent consumers in many, if not most, potential new global markets that true quality lies only in Europe, particularly in France.
The French in particular have been very adept at capitalizing on this and reinforcing these perceptions. This mirrors the development of the U.S. market several decades ago. Education and a long game will be key to overcoming these perceptions for the category.
How is globalization changing the business for small to large growers and wine producers?
Eva Bertran: Any California winery that sells outside of the tasting room is competing at a global level. Wines from all over the world are sold in the U.S., and we are all competing for the same space in the wine list, on the shelf and in consumers’ minds.
Why should it be different in any other country where wine is consumed? If there is space in Japan for a wine from New Zealand and Spanish wine, why not a Californian?
Globalization has raised everybody’s bar. Great wines are produced all over the world, and they are all at a great value.
Our import business is almost 100 times bigger that our export business. On top, we compete in exports almost exclusively in sparkling wine. We export around 10,000 cases annually of Gloria Ferrer, but we import into the U.S. 1 million cases from Spain, France, Italy, Argentina, Australia and Mexico. Gloria Ferrer has been exporting for almost 20 years, and we are one of the few premium California sparkling wine producers that is actively exporting.
Stephen Brauer: In the U.S., consumers are discovering and embracing new countries of origin and new varietals, intensifying the competition for shelf space and wine lists.
Conversely, there is growing interest in Europe and Asia, in particular, in U.S. wines — and in particular for the “next generation” of wines from California — that emphasize quality and regionality over price.
David Hayman: We find that today both supply and demand operate with global constraints that are actually very broad, which helps to create a true global marketplace for wine. This puts growers and producers in a better position to be able to take advantage of global opportunities. Ten years ago, this business was much more U.S.-centric.
Paul Hobbs: The market is more competitive than ever, but wine continues to become more in demand than ever. So it’s a matter of capitalizing on that. As a smaller producer, we have the flexibility to position ourselves as a broader presence in some markets and target a more focused market share with prestige placements in others, as appropriate.
That said, the consolidated global corporate drinks giants with deep pockets for marketing initiatives will likely take a large share of the business from independent producers until these markets become more mature.
What are the biggest opportunities and challenges in the current international nature of the wine industry, and how is your company addressing them?
Eva Bertran: Value of the U.S. dollar, local economic conditions, differences in harvest yields, transportation costs and environmental requirements all have positive or negative effects. The bad harvest in 2011 will have an impact — less wine produced, higher costs. Transportation costs are always going up, so that has a negative impact in the final cost of the wine laid-in the countries. We sell in U.S. dollars, so we do not have a currency risk. However, the prices to our importers is more volatile. Right now, the weaker euro will mean Gloria Ferrer will go up in price in Europe, while our competitors from Europe will not have the same price pressure.
Market conditions change constantly as well as consumer preferences. For example, Italian prosecco is growing faster than any other sparkling wine category in the U.S. This has changed the level field for all our sparkling wines: both Gloria Ferrer and our Cavas Freixenet de Mexico and Segura Viudas. After all, we are all competing for the small section in the wine list called “sparkling wine” and for the consumer’s mind for occasions on which they decide to drink sparkling wine.
Stephen Brauer: The biggest opportunities include the favorable exchange rate for U.S. wines and growing interest and awareness for California wines as an interesting, viable option for consumers looking for an interesting alternative to “old world wines.”
The biggest challenges are the stereotypical image of California wines as low-cost jug wines and lack of awareness of the rich diversity and regionality of California. Our strategy to combat this image is education, tastings and one-on-one “conversions.” It’s called, “selling, the old-fashioned way.”
David Hayman: Rapid changes in key parameters such as exchange rates, cost of goods, weather and market power of many areas of the supply chain — suppliers and sales — create opportunities and challenges in the increasing international market where we operate. Diageo’s experience, structure and global network allow us to adapt quickly to these market changes.
Paul Hobbs: We have a great opportunity in that we have established a mature, prestige brand in Paul Hobbs, along with the emerging CrossBarn brand bearing my name for high-quality wines at lower price points. With suggested retail bottle prices of $25 to $250 and very high quality at all levels, we are a luxury brand who can offer an appropriate mix of the two brands by market. This also allows us to respond to varying economic conditions by market.
Additionally, our pioneering work in South America, the success of Vina Cobos and Paul Hobbs Imports, and our strong personal relationships with suppliers around the world via Paul Hobbs Consulting put us in a strong position as drivers in the globalization of wine.
Several low-yielding growing seasons in a row present obvious challenges to continuity of supply. Correlative grape price increases are an added challenge. Creative solutions include looking to new AVAs [American Viticultural Areas], establishment of estate properties and streamlining operations wherever possible to maximize margins and avoid retail price increases from the winery.
Regulations are always in flux. Some hamper, some help, but we continue to broaden our presence and open new markets.
What factors will accelerate or slow moves to gain a presence in the U.S. wine market via acquisition, investment, distribution agreements or other means?
Eva Bertran: Conditions of the market of the parent company, interest in a given market and the portfolio balance that it will bring to the company are deciding factors.
Freixenet Group has had two big growth periods in the last 30 years. The first was in the early ’80s with the acquisition of two wineries in Spain (Segura Viudas/Rene Barbier and Castellblanch) and Champagne Henri Abele, the third-oldest Champagne house. Then came the acquisition of land in the Sonoma County side of Los Carneros appellation to build Gloria Ferrer and in Queretaro, Mexico, to build Doña Dolores Winery.
The other growth period was in the late ’90s and early ’00s with the acquisitions of land in Mendoza, Argentina; wineries or land in most major appellations in Spain (including Rioja, Ribera del Duero and Priorat); Wingara Wine Group in Australia, with properties in Mildura and Coonawarra; and the acquisition of Yvon Mau, a large producer and the third-largest negociant in Bordeaux, France.
Both growth spurts were preceded by a decade or so of good and constant growth of sales and profits. Buying wineries abroad — for example, in Bordeaux — made more sense to grow sales in that market than to invest in different activities to grow cava sales in France.
Stephen Brauer: The main barriers or accelerators of acquisitions of U.S. assets by a foreign companies are access to capital, favorable foreign exchange rates and a strategy that warrants investment. The key is access to capital.
Distribution access is less complicated with an importer, but challenges include finding one who can and will prioritize your brand or portfolio.
David Hayman: Trade access is not something we see is a major issue today. High land costs in the U.S. do present challenges for U.S. producers, especially when competing with lower-land-cost countries.
Paul Hobbs: The major challenges are the continuing difficulties posed by the three-tier system in the U.S., the cost of entry to the U.S. market and the limited number of importers willing to take on and develop independently owned brands.
Many foreign suppliers have opted to give up on traditional brand development and focus on direct sales to major retail chains. They settle for regional presence rather than national but improve pricing by bypassing import company margins.
What will drive or impede such expansion by U.S. companies abroad?
Eva Bertran: It is no different than for foreign companies coming to the U.S. As the U.S. economy gets better and profits increase, an inversion (of conditions) abroad may look more financially interesting than a couple of years ago. It may not help sell your U.S. wines, but you will be selling domestic wines in that market.
Stephen Brauer: Really, the same principles apply as for foreign producers. Finding a compatible distributor can be quite challenging overseas, as most international distributors have exclusive arrangements with suppliers.
If you are late to the game, you might be shut out of a market or, at least, forced to align with a second-tier partner.
The best solution is having a strong brand proposition, the patience and determination to build a long-term relationship and investing against a long-term goal. Success overseas won’t happen overnight.
David Hayman: Investment abroad by U.S. companies will follow opportunities as they appear. Such expansion will be driven, in large part, by shifting economic conditions both within the U.S. and globally.
Around the world, the wine industry is experiencing significant change, with innovation driving new companies and brands. While different in each country, consumer trends are evolving rapidly, driving fast change within the industry with an increased focus on lifestyle brands, simplification and ease of pairings.
Paul Hobbs: In addition to economic conditions, exchange rates and other constant factors, presence on the Internet and promotion of established wine critics to a truly global audience will aid share of mind for the U.S. category internationally in a way that would not have been possible even 10 years ago.
Copyright © 1988–2013 North Bay Business Journal
View the policy for linking to website content.