Sutter Home CEO: Is US wine business in late innings of 'premiumization' shift of bottle prices upward?

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Wine business insights

These key players on the California North and Central coast and in Oregon talk about what’s coming for the industry and layout of the marketplace now.

David Duncan, proprietor, chairman and CEO, Silver Oaks Cellars

Corey Beck, CEO and winemaking chief, Francis Ford Coppola Winery

Bob Torkelson, president and CEO, Trinchero Family Estates

Alex Ryan, president and CEO, Duckhorn Wine Company

Dan Baker, executive vice president, Korbel

Michelle Benvenuto, executive director, Winegrowers of Napa County

Ron Denner, Denner Vineyards

Cam Baker, proprietor, Larkmead Vineyards

Tom Bonomi, president and CEO, Price Family Vineyards & Winery

Steven W. Spadarotto, Far Niente Wine Estates

Sarah House, director and senior economist, Wells Fargo

They are set to speak at North Bay Business Journal’s Wine Industry Conference in Santa Rosa on April 18.

While Sutter Home may be the best-known of the 60-plus wine and spirits brands Trinchero Family Estates produces or imports for itself and others, the Napa Valley-based family company also makes brands that reach into the luxury tier.

The Trinchero family got into the wine business in 1948 with Sutter Home Winery in the valley. From the sweet rose wine "white zinfandel in 1975, the portfolio expanded above $10 a bottle with Ménage à Trois in 2004 and Trinchero Napa Valley in 2007. The company has 10 wineries in California, producing the equivalent of about 20 million cases a year.

After 13 years as president and chief operating officer, Bob Torkelson moved up to CEO in 2017.

He's set to join a panel discussion at the Business Journal's Wine Industry Conference on Thursday. He talked with the Journal about responding to demand for product and packaging innovation from consumers, retailers and wholesalers, managing rising grape and wine costs, and not leaving behind consumers amid "premiumization."

What are hot trends in the premium wine business?

The red blend category continues to grow, albeit slower. Cabernet continues to grow, albeit slower than it has. Red wine is the area that the consumer seems to be interested in.

We see portability becoming more important to people. Everybody wants to talk about can, TetraPak and box-wine business. Alternative packaging goes along with that portability.

Cans and boxes, is demand for those coming from your trade partners or from consumers?

It’s more (from) trade partners today, whether it’s wholesalers or retailers, than it is the consumer at this point. There’s hope that consumers will continue to evolve the way they use wine in more occasions, so having versatility around packaging is important. (Consumers are) going to have many, many options and, hopefully, the consumer responds.

How have you responded in that interest from the trade for more portability?

We are in all of those categories: can, TetraPak with multiple brands, box wine with a project we do with Target stores. We do see growing interest in those categories. It’s important for us to be innovative and diversify, but the big thing is to just stay relevant and not get too carried away with some of these trends that look like they might be unsustainable. I don’t know how the retailer’s going to put 16 new can brands into their account?

What about other trends, such as kegs on premises?

We’re involved in the keg wine business. We see some activity there, primarily in the urban areas where managing inventory of large amount of cases and, more importantly, the leftover, the refuse, eliminating trash. There is just no place to keep it in some of these urban accounts.

We see other trends that are starting to catch hold — certainly, rose. It’ll be interesting to see this summer if the consumer is going to respond and consume as much rose that’s been produced by a lot of people. Whether there is a hangover in that category remains to be seen. Sometimes in our industry, we can’t help ourselves; we think if a little bit as good, a lot must be better.

There’s also opportunity in low-alcohol wines. I think the younger generation is more interested in sobriety.

Given the regulatory structure, will that take a major retooling for producers to really access the lower-alcohol category?

The primary issue is, can we make a product that has acceptable quality levels and taste the way consumers want it to taste yet still deliver lower alcohol? That’s been the quandary that many of us have. We can certainly make low-alcohol lines, but does anybody want to consume those?

Wine business insights

These key players on the California North and Central coast and in Oregon talk about what’s coming for the industry and layout of the marketplace now.

David Duncan, proprietor, chairman and CEO, Silver Oaks Cellars

Corey Beck, CEO and winemaking chief, Francis Ford Coppola Winery

Bob Torkelson, president and CEO, Trinchero Family Estates

Alex Ryan, president and CEO, Duckhorn Wine Company

Dan Baker, executive vice president, Korbel

Michelle Benvenuto, executive director, Winegrowers of Napa County

Ron Denner, Denner Vineyards

Cam Baker, proprietor, Larkmead Vineyards

Tom Bonomi, president and CEO, Price Family Vineyards & Winery

Steven W. Spadarotto, Far Niente Wine Estates

Sarah House, director and senior economist, Wells Fargo

They are set to speak at North Bay Business Journal’s Wine Industry Conference in Santa Rosa on April 18.

Is that mainly because of removal of alcohol or just making it with lower alcohol to begin with?

It’s a combination of those factors. There are ways to remove alcohol that maybe aren’t all that great for the remaining product. There are ways to vinify, pick earlier and do all those things.

Everybody defines lower alcohol in different ways. Our winemaker certainly would like to keep some alcohol in the product, because it just creates a different mouthfeel to consumers. So it’s gonna be a challenge, but younger consumers, in particular, are migrating to it. We need to be there and be relevant.

Talking about being innovative and thinking in new ways, there’s been a lot of talk over the past several years about premiumization, moving brands upscale. Is this something that’s still gaining momentum?

We’re probably in the late innings of that. If everybody in the world is focused on premiumization, we leave out a big segment of the market that’s not interested in that. I heard an interesting comment from a retailer, “Look, for everybody that wants to talk about luxury, for some people an $8 bottle of wine is luxury.”

If we stop thinking about the market in the aggregate and how we continue to make the industry work for everyone, and we just focus on that tiny tip of the pyramid that is around premiumization and luxury, we turn our backs on a big piece of what the industry can be.

On things moving upscale, what has been the impact of the grape and bulk-wine pricing on the movement of brands upscale on existing players in the marketplace and competition from the negociant model?

There’s no better economics lesson in the world than supply and demand around pricing.

We also had the impact of some of the fires, the impact of some of the limitations we’ve got environmentally here in California around water and land use.

We’ve got a finite amount of resources here and great demand in some areas and not so much in others. We’re starting to see the supply situation, in our view, equalizing in some respect, and coming a little bit closer to equilibrium. We would hope that at that point, pricing for fruit inputs would moderate.

Things really started to accelerate in late ’80s, early ’90s. There were a lot of vineyards in California planted at that time. Those vineyards now are reaching the end of their maturity. There are decisions now that need to be made about whether they’ll be replanted, how they’ll be replanted and what they’ll be replanted with.

With premiumization and the runup in pricing of inputs, is that creating a problem with embedded costs as things move toward equilibrium?

That’s true. We live in a world where there’s not a lot of pricing power; you can’t really raise your prices enough to offset some of the increases you see in labor or grape prices. Consequently, margins get pinched a little bit. Mix is an important element, so if you have a broadly diverse portfolio and you have a higher margin items, it’s more difficult to make those work when the pressures continue.

Whether it’s your people or the growers, they all they all want to raise, and they deserve it because they all work hard. But when you can’t move pricing on a particular brand or a style of wine, that makes it difficult.

Are there certain price segments or product styles that are harder to move pricing than others these days?

The entry level part of the wine business. It’s no secret that’s been difficult, because of people’s migration towards box wine and away from larger-size glass products. Those entry-level wines are harder to take price (increases) on today.

That is why you see some of the rumors around some of the large publicly traded companies that want to exit that space.

It’s going to be a race for people to develop brands where you can still enjoy some margin, hopefully build brands and be able to reinvest in the brands that have greater returns.

How do you see the export market these days?

We export a fair amount of a wine. I would say we’re a bit underdeveloped. We sell wine in probably 50 different countries, some with greater success than others. The big markets for us are Canada and Scandinavia. Poland’s a decent-sized market. A little bit in Asia.

We see it as an opportunity, but where wine consumption is large, they’ve got a pretty big native business of their own.

It’s difficult to penetrate some of those markets, particularly the Old World: France, Italy, Spain. We compete against those in the Old World and some in the New World: Australia, Argentina, Chile.

Tariffs haven’t really helped us, so we’re hopeful that we get some relief in Asia as the country negotiates some tariffs.

What is the impact of imports, with more trying to get into the premium side of the market, and of growing competition from other U.S. wine regions moving more premium?

The big differentiator there is you gotta really produce a high-quality product. And if you can make a great Napa Valley wine then sell it at a reasonable price, you’ll have an advantage, just as you would any other time. Packaging is important.

The way people are purchasing one is changing. The internet’s playing a bigger role, and you’ve got to have robust capabilities around that to be successful.

Have you few seen major shifts from boomers to Gen X and millennials?

It’s the circle of life. The vast proportion of a wine today is still consumed by people over the age of 50. Younger people for a multitude of reasons — some economic, some just generational — haven’t really embraced the category the way some of the older generation has.

It’s a matter of how we can continue to address it to bring more people into the category, whether it’s wine styles that are attractive to people, lower alcohol, packaging, portability or convenience.

How much does winery visitation fit into your brands?

It’s an important element. When you have a good experience for the consumer, they take that home and talk about it. So our visitor centers are important. They help us create that bond with the customer where you can show them, teach them about a little bit about what your brand’s all about, how it’s different.

Not everybody gets a chance to come to the Napa Valley. The hard part is, how do you bring that experience to them, whether it’s digitally or an experience that they have with a retailer where they can learn some things?

If they have the curiosity and want to learn about your product, they can go on the internet, and the world is right at their fingertips. It’s a little bit different than when I got into this business a long time ago. That really didn’t exist.

Creativity is going to really make the difference for brands and companies to think about ways that people want to behave, whether it’s have wine delivered, click it and pick it up at a store. Virtual tasting is a way you can have an experience and decide whether you like a product before you make a commitment.

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