Bulk-wine inventory hits 12-year low

SANTA ROSA -- The tightest inventory of top varieties of wine available for purchase in bulk in a dozen years and a dwindling supply of those winegrapes could extend the rise in pricing for those fine-wine components into this year, but wineries are hard-pressed to pass those cost increases to consumers who are continuing to look for discounts, according to experts at a major local wine industry seminar this morning.

The volume of wine California vintners were trying to sell to other vintners in bulk reached peaks of 15 million to 25 million gallons since 2000, according to presentations by Brian Clements and Marc Cuneo of Novato-based Turrentine Brokerage at the 21st annual Sonoma County Winegrape Commission Dollars & Sense seminar. Yet wineries' aggressive efforts to reduce inventory since 2008 together with three lighter-than-normal harvests have siphoned the bulk-wine inventory down to 4 million gallons now.

"This is the first time I've been involved in a market flip that was not about sales," Mr. Clements said to the audience of a few hundred. "This flip has been about inventory."Supply shrinks for top winegrapes as bulk wine[poll id="8"]

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The biggest supply squeeze is on cabernet sauvignon, the brokers said. Acreage waiting to come into production in the North Coast has been below the typical annual rate of replacement since 2007, Mr. Clements said. This has been reflected in the weighted-average price per ton for Sonoma County cab not in long-term contracts rebounding from $1,155 in 2009, $1,232 in 2010 and $1,811 last year nearly back to $1,861 in 2008, per Turrentine figures.

"If wine sales continue as they have, we can look for a very deep shortage of cab in the North Coast," he said. Mr. Clements warned of this coming shortage in Business Journal columns in March, July and December.

This shortage is reflected in the dramatic drop in available bulk cab wine for sale to 400,000 gallons for all the state -- much less is available from the North Coast -- from 5 million gallons in 2007, according to Mr. Cuneo. A shortage of grapes for sale is bringing wine buyers out a few months earlier in the season.

Another variety with pressure on supply is chardonnay. In Sonoma County, where chardonnay is the top winegrape crop, little new acreage is coming online because of little planting in the past several years, Mr. Clements said at the winegrape commission seminar. Accordingly, the weighted-average price for grapes without long-term contracts, like for cab, rebounded to $1,558 a ton last year from $1,361 a year before. Spot-market prices matched county average prices for the variety, much of which is under multiyear contracts, in 2005 and 2008 and are heading back up.

"We've never had a structural excess of chardonnay," he said.

And in the past year, demand for chardonnay as bulk wine has slurped up what was left over from the 2009 harvest, and the reduced tonnage from 2011 led to even less being available for bulk purchases, Mr. Cuneo said. That has sent average prices for bulk Sonoma County chardonnay from $8.63 a gallon at the end of 2010 to $12.41 at the end of last year, and average prices this year are even higher.

Merlot winegrape acreage surged to more than 7,000 acres in Sonoma County until a retrenchment from the varietal wine after the release of the movie Sideways in 2005 contributed to a 40 percent reduction in merlot acreage to around 4,000 acres now, Mr. Clements noted. The use of merlot in cab wines as well as in proprietary blends in the past 11 years is even more problematic now because little bulk cab and merlot are available, Mr. Cuneo said.

Makers of pinot noir wines from North Coast grapes may face similar shortages as the amount of acreage still coming into commercial production shrinks, Mr. Clements said. In Sonoma County, the percentage of nonbearing acreage for the variety has fallen to 9 percent this year from 14 percent last year and 50 percent in 2001. Five percent of winegrape acreage is estimated to be replanted or otherwise taken out of production annually.

This is reflected in average spot-market pinot noir grape prices rebounding to $2,238 a ton last year from $1,863 in 2010 but still below $2,882 in 2008.Consumer spending improves

On the wine demand side, consumers were getting more comfortable about discretionary spending at the end of last year, even though 84 percent think the U.S. economy is still in recession and not likely to recover within a year, according to Nielsen beverage alcohol market analyst Mike Colicchio, another seminar speaker. Consumer confidence measures were heading back upward late last year after six months of declines, and spending on entertainment outside the home and travel is improving, he added.

Though dollar sales for half the product categories in grocery stores are growing because of inflating prices, particularly in the past two years, wine is among the 20 percent of categories with growing unit sales and is the No. 5 fastest-growing category, Mr. Colicchio said.

Grocery stores account for nearly 68 percent of California table wine sales nationwide, according to Nielsen's data from store scanners and consumer panels. Wine sales in restaurants and other on-premise channels have been growing but remains below what they were in 2008, Mr. Colicchio said.

"In these tough times, we want to feel good or look good," he said.

North Coast wines continue to enjoy the strong low double-digit store unit sales growth along with the over $15 a bottle segment in general, Mr. Colicchio noted.

Three-quarters of Sonoma County wines retail in for less than $20, with many in the $9 to $15 tier, and top-selling varieties cabernet sauvignon, chardonnay and merlot are top county wines, he noted. Forty percent of Napa County wines retail in stores for more than $25.

Yet this growth continues to be fueled by winery incentives to distributors and retailers to propel bottle sales, Mr. Colicchio said. Fierce competition on store shelves behind may not change this year, he added.Vintners consider alternative sources for grapes, wine

Recently, wine producers in the North Coast and elsewhere in the state have been asking wine and grape brokers about alternative sources for grapes and bulk wine as the markets for both tightened late last year, said Glenn Proctor, partner of San Rafael-based Ciatti Co. in an interview after the seminar. Some even are considering bulk imports from overseas to keep production at the level of sales.

"We've seen prices in terms of bulk wine and grapes strengthen in the past six months, and we have been getting calls not just from very large producers but also small- to medium-sized wineries about what is available to them at what price from these countries," he said. "The concern in the next six months is that they can't take the price in the bottle (up) as their cost of goods goes up, so how can they reengineer their supply to produce wine appropriate for the cost and quality the consumer wants."

Trouble is, the international market for bulk wine has been tightening too, after vineyards production has been removed or weather-hampered in recent years, and a weakened U.S. dollar has made imports more expensive, according to a recent report from agricultural lender Rabobank International.Coastal high-end wines face competition from imports

And now higher-end wines from the California's North Coast and Central Coast face increasing competition from European wines retailing for more than $20 a bottle because of dwindling disposable incomes on the continent, decreasing value of the euro and marketing subsidies from governments, according to Steven Rannekleiv and Vernon Crowder of Rabobank's Food and Agriculture Research. They presented the industry outlook report to a few dozen professionals at a bank-sponsored briefing held at the Vintners Inn in Santa Rosa on Wednesday evening.

"When consumers want to spend $50 on wine, they may be willing to take a risk on French wine but not on wine from Chile," Mr. Rannekleiv said. He called it a "perfect storm" for European exports, particularly from France, Italy and Spain.

For example, a 2 percent to 3 percent decline in Spain's domestic wine consumption, most pronounced for on-premise sales of high-end wines, has led to a 7 percent to 8 percent increase in exports for wines from the country's premium Rioja region.

"It's certainly not doom and gloom for Sonoma and Napa, but it is an added level of competition," he said.Moscato, red blends, 'unoaked' chardonnay top emerging wine trends

Emerging trends in store wine sales, tracked by label descriptions, are moscato and other sweet wines, which make up 0.5 percent of total wine sales; red wine blends, 4 percent; and "unoaked" chardonnay, o.5 percent, Mr. Colicchio told the Dollars & Sense audience.

Sales of moscato or muscat wine soared 213.4 percent in the last months of 2011, though the category has only a half-percent of U.S. wine sales. The growth trend over the past three years toward sweet wines is expected to continue, Mr. Colicchio said.

The core buyers for the variety are African American and have lower to middle household income, he said. A possible reason for that popularity is the variety has been mentioned in rap music.

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