North Coast wineries fight for survival amid the coronavirus pandemic

The coronavirus pandemic has disrupted the California North Coast wine industry like no other event since Prohibition. More than the effects of drought or wildfires. More than a lackluster grape harvest. Even worse than President Donald Trump's international trade wars, particularly with China, which has crushed U.S. wine exports to that nation as the Chinese retaliated with tariffs nearly doubling the cost of a bottle of California wine.

Since March, the most visible debilitating effect has been the closures of about 300 Sonoma County wine tasting rooms that typically provide a steady cash flow for wineries and a big marketing draw. There's also far fewer visitors driving through the scenic Dry Creek Valley area outside Healdsburg, where at this time of the year usually would be teeming with people stopping at the 60 ?wineries to taste favorite vintages.

The industry's pain has been compounded by the shutdown of bars and restaurants across the county and country, which feature the premium wines produced in this region. The pandemic-induced economic plunge occurred at the worst possible time for the wine sector. It already had been grappling with flat retail sales, a glut of grapes and an excess supply of bulk wines.

The calamitous effects of the virus ensure there will be a contraction in the domestic wine industry, in which California and Sonoma County are big players, vintners said. The sector contributes $57.6 billion to the state economy, according to industry trade group Wine Institute. The U.S. has more than 10,000 wineries, 450 of them located in this county, producing $23.5 billion in total annual sales. Not all will survive beyond COVID-19, wine company executives and industry analysts said.

“It's a very different world, no question about it,” said Pat Roney, chief executive officer of Vintage Wine Estates of Santa Rosa, which has a portfolio including B.R. Cohn Winery in Glen Ellen, Sonoma Coast Vineyards in Bodega Bay and Cosentino Winery in Napa.

In the worst-case scenario, the domestic wine industry could lose up to $6 billion over the next year, said winery consultant Jon Moramarco, noting California produces 81% of all U.S. wine. Half of that loss would be the diluted tasting room business, which is about 80% of overall annual revenue for all but the largest tier of wineries that generate a large portion of their money from retail sales. Another $2.5 billion would be lost from sales to restaurants, hotels and other customers who buy wine at winery properties. The average winery earned about 15% of its revenue last year from such on-premises sales mainly in tasting rooms that taken together tallied $3 billion, according to the most recent survey by Silicon Valley Bank's wine division.

Indeed, the wine industry is the main driver of the Sonoma County economy, employing an estimated 55,000 people before the coronavirus arrived nearly three months ago and generating billions of dollars a year in economic impact through tourism and many small and large events - many during the summer months and canceled this year. In April, the county's agriculture sector shed 5,000 jobs, and many of those positions likely were held by workers at wineries.

The overriding question is how many area wineries will make necessary adjustments to make it through the pandemic.

“People have to put back on their entrepreneurial hats and think how do I do business going forward, because it's going to be different than what I did a year ago,” said Moramarco, the managing partner of bw166, a winery consulting firm in Santa Rosa.

So far, there hasn't been any notable closures or buyouts in local wine circles, but they are expected to come.

“It has always been my position that there were too many brands in the wine industry,” said John Jordan, chief executive of Jordan Vineyard and Winery in Healdsburg. “Too many boutique brands. I think this (pandemic) situation, and the fallout from this, is going to put a lot of pressure on those lesser-known, small-quantity producers.”

Scrambling to adjust

Small or large, area wineries are pivoting. That includes giant Jackson Family Wines of Santa Rosa, the nation's ninth-largest wine company, producing an estimated 6 million cases last year. Jackson ramped up its online platform to reach consumers digitally under all of its various brands, after temporarily closing 13 tasting rooms in Sonoma County. Now two - La Crema and Kendall Jackson - have reopened on an appointment- only basis.

Family-owned Jordan winery also quickly shifted to retail sales channels given that almost 70% of its more than 100,000 annual wine case production typically was sold in high-end restaurants. The winery was able to get placement in retail stores by February before restaurants began to close so “we are completely tracking even with our sales,” Jordan, the CEO, said. The restaurant business is now about 45% of annual sales for Jordan.

The wineries most at risk are the smaller ones. Moramarco has done an analysis that shows wineries producing 1,000 to 5,000 cases a year could experience a revenue loss of 47.5% this year. Those producing fewer than 1,000 cases could lose 66% of 2020 revenue.

One regional boutique brand is Smith Story Wine Cellars of Philo in Mendocino County. This month it celebrated a somber seventh anniversary. Both of its tasting rooms remain closed and the winery has suffered a massive decline in wholesale business. Smith Story has lost an estimated $1 million in sales since mid-March, co-owner Ali Smith Story said.

In this trying time, there is hustle and determination. “We are very much in startup mode right now,” Story said. For example, she was out May 15 making 24 home delivery drop-offs to customers as far away as San Francisco.

Driving a rental car, Story expressed appreciation to loyal wine club customers at each delivery stop. She and her husband, Eric Story, now produce 3,000 to 5,000 wine cases a year with bottle prices from $20 to $80. With unemployment plunging to Great Depression-era levels, the winery has dropped the prices of sauvignon blanc and rosé to be price sensitive for consumers.

And there is a renewed sense of purpose for the entrepreneurial couple.

“We started this with a base of knowledge on the wine business, not with a silver spoon or a bunch of money that we made in Silicon Valley. We are doing this because we want to do,” she said. “It's to stay relevant.”

Despite the industry turmoil on the outside, behind the scenes at Smith Store winemaking and bottling go on inside cellars. Marketing and administrative staff are working from home, though there have been layoffs.

Making wine uninterrupted

While area tasting rooms were shut down, wineries have continued production and bottling. Meanwhile, farming continues across the region to prepare for the annual grape harvest that gets underway in mid-August. Crews now are removing unnecessary shoots from grapevines while workers maintain proper physical distance between vineyard rows.

“It's fairly easy to spread folks out in the vineyard,” said Jeff Bitter, president of the Allied Grape Growers, a grower-owned marketing group that represents about 150 farmers in the region. “Most of the time that they work, they do spread out.”

The value of the 2019 Sonoma County harvest of wine grapes was $637 million, according to county data. The estimated annual winery revenue from those grapes last year was $2.6 billion, Moramarco said. The two figures underscore what's at stake during the annual harvest and why it is critical to the industry and local economy. Across the four-county North Coast region, the oversupply of grapes dragged down the value of last year's harvest by 15% to $1.7 billion. The 490,922 tons of grapes picked was a 17% decrease from the robust 2018 pick. Last year, the glut caused an untold amount of grapes to be left unsold on vines in the region.

Although wine tasting rooms in the county began reopening Memorial Day weekend, county public health officials have limited them to serving outdoors, and they must serve food with the wines to operate. More than a dozen restarted, with 10 more planning to open soon, according to the Sonoma County Vintners trade group.

However, tasting room reopenings are no panacea for the industry's virus-related challenges. Crowds are expected to remain thin through the summer and few people will be coming from a long distance. “I think we are still going to see a softness in people wanting to travel,” Moramarco said. He predicted that it would take until June 2021 for tasting rooms to generate the revenue they had before the coronavirus struck the United States early in the year.

“Nobody is going to get on a plane this year,” said Rob McMillan, executive vice president of Silicon Valley Bank's wine division, noting tasting rooms should be prepared for customers who can drive from nearby or somewhere else in the state.

Francis Ford Coppola Winery in Geyserville reopened last Sunday and had 100 visitors for lunch and dinner, and 46 people for wine tastings, said Corey Beck, the chief executive. The winery typically would have hosted about 400 people over the Memorial Day holiday weekend since it is a big tourist attraction with memorabilia from the famed film director in the chateau plus a large pool on the property. Both areas remain closed.

“We had people who were very enthusiastic to get out. We had little to zero problems. People all had masks on. Even if they didn't show up with them, we supplied them with it,” Beck said. “More than anything, I think it was a little good morale boost not only for our guests but for our employees.”

Despite the decline in sales at the winery, Coppola has made up for it with online and grocery business. Its canned wine has sold well in both channels, Beck said. During the onset of the pandemic, the CEO called the winery's e-commerce sales “mind-blowing.”

Keeping customers safe

With public health in mind, the local wine sector has taken extra steps to make customers safe. The Sonoma County Vintners trade group took the lead on a framework of best practices instrumental in local health officials allowing tasting rooms to resume food and wine service. Servers have their temperatures checked before each shift and they wear face coverings while working. Wine tasting stations are spaced at least 6 feet from each other. Customers visit by appointment. The wine bottles are only handled by tasting room staff. Wine dump buckets have to be removed at the end of every tasting session.

“The idea of having a long bar for tastings, that isn't going to fly anymore,” said Stephani Robson, senior lecturer at Cornell University School of Hotel Administration, who studies restaurants and wine tasting rooms.

Jordan Winery redesigned its visitor experience to be primarily outdoors on its Healdsburg property. It was the first local winery to offer an outdoor customer event since reopening. Last weekend, it began guided vineyard hikes by appointment for $220 per couple. At the end of the 4-mile trek, visitors get a curbside pickup picnic lunch and two bottles of wine. On June 11, Jordan will resume seated food and wine-pairing experiences.

“We don't have to change too much. We just moved the location for a lot of our experiences outdoors. And we are taking advantage of this to revamp our inside spaces,” Jordan said. “We have built some new locations for people who have been here on the property that will be fresh.”

Vintage Wine had furloughed about 140 employees on the hospitality side and found spots for 25 workers in other positions. As the tasting rooms reopen, workers will be brought back.

“This is just so much pervasive,” Roney said of the economic impact of the pandemic compared to natural disasters such as fires. “We're diversified enough where we will be fine on the business side, but it's certainly challenging and interesting to see how it pivots for the next year or two.”

Selling wine online

In the retail marketplace, big wine companies always have had a much easier time since they dominate supermarket shelves. For example, Jackson Family Wines has had vast retail shelf space nationwide, and the company is aided by having its own wholesaler in California.

Grocery store shelf domination is not enough to sustain large wineries, however. Research firm Nielsen reported that the U.S. alcohol market would need a 22% increase in volume in retail and online sales to make up for the sharp drop in sales at bars and restaurants since the global pandemic began gripped the country in early March. Such growth would have to come from more online sales. Such efforts appear initially successful as Nielsen said online sales of alcohol have shot up 234% from a year ago. And as people shelter at home they are buying more wine online, up 35.6% from March 7 through May 9 compared with the same stretch in 2019.

Jackson, the county's largest winery, has been buffeted somewhat by newfound success luring customers through its new website. Online sales the first month matched those of some of the winery's best direct-to-consumer sales of its individual brands.

The website was an idea “we had talked about in the past, but when we saw consumer demand for online orders across our other estates we thought, why not now? Employees who worked in now-shuttered tasting rooms were moved into customer services, packing, shipping or delivering roles,” said Kristen Reitzell, spokeswoman for Jackson Family Wines. “Overall, it is a simple concept, but one that's proven successful and was an important shift for us to keep our business moving forward during a period of uncertainty.”

Even with the adjustments, Jackson had to furlough 58 employees in Sonoma County and another eight in Napa County, according to recent data from the state Employment Development Department. Rick Tigner, Jackson Family Wines' CEO, declined to be interviewed for this story about the coronavirus effects on the company.

Innovating to survive

Ali Smith Story is determined that Smith Story Wine Cellars will not become a casualty of the virus-induced economic coma. She and her husband and business partner, Eric, have been doing more than customer deliveries. They are trying to strike a balance in wine operations, including reaching out to their grape growers to explore ways to cut costs, such as having crews make fewer passes in a vineyard to do leafing and monitoring of fruit. “That all adds up,” she said. “We are having those real conversations with growers.”

They also are relooking at ways to lure visitors to the tasting site Smith Story Wine shares with other wineries at the Grand Cru complex in Windsor slated to reopen later this week. Although close to the popular Russian River brewery, restaurant foot traffic had been minimal at the site before the pandemic. The couple also has a space at The Madrones compound in Philo offering food and wine tasting.

With uncertainty when tasting room sales will come back to what they had been, the winery couple even has thought about leveraging their strong following in Colorado. They're considering weekslong tastings in the Rocky Mountain State, whether in the homes of wine club members or partnering with restaurants or retailers. “It's having a different change of scenery and getting out of the grind,” she said.

But it's the connection with customers Ali Smith Story misses most and hopes to renew once the winery's tasting room visits resume.

“We are so personal with our people,” she said. “It's going to be so hard not to be a big hug fest.”

You can reach Staff Writer Bill Swindell at 707-521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.