Wine 2005

Americans
not only consumed greater quantities of wine during the year
(about 3 to 4% more, as has been the case for several
years), they drank more red wine and on average they drank
more expensive wine. Blush wine, primarily White Zinfandel,
continued to decline as a percentage of the market. The only
earth-shattering news is that, despite the eroding dollar
and severe tremors in the credit and housing markets,
imports continued their surge, expanding at a rate several
times that of domestic wines (up approximately 12% compared
to about 1 to 2% for American wines sold in the US). Each
year, it seems, we are purchasing more wine from overseas
sources regardless of the relative strength or weakness of
our currency. As the percentage of domestic product in trade
channels continues shrinking, the US now stands poised to
surpass Germany as the single largest importer.

Despite this growth,
however, there is less optimism in the trade than there has
been in years, largely owing to expectations for an economic
slowdown based on weaker growth, rising energy and
transportation costs and less projected discretionary
income. Although there is

still an over supply of
some varietals based on faulty projections about what to
plant, prices, by and large, have continued rising due to
steeper production and distribution costs. There is a
general sense of unease at year-end with too many
undifferentiated products at the moderate priced end of the
markets chasing the same consumers. Brand proliferation has
increased; there were 21OO wineries in the United States in
2OOO, now there are 56OO, a growth rate of 166% in 7 years.
The long term trend of American consumers switching from
beer to wine has apparently stalled, with wine now
accounting for approximately 9% of the total volume of
alcohol beverages (about 685 million gallons, or 29O million
9-liter cases) sold in the country.

In the past six years wine
consumption has grown 24.7% (the
vast majority of this coming in 2OO2 through 2OO4), beer
consumption 1.8% and spirit consumption 17.6, but economic
pressures appear to have slowed this trend.

As has been the case for
several years, the more distinctive artisan wines that are
sold based on their uniqueness and their story are faring
better than those that are marketed primarily by brand at
the lower end. “Premiumization” or the desire for wines with
special attributes priced at the upper tiers, particularly
over $15 retail, seems to be where the market is headed,
with sales in this category increasing over 2O% again. Over
7O% of the wines in this highest price tier are red (with
Cabernet Sauvignon, Merlot and Pinot Noir accounting for all
but 4% of this number). Interestingly, the vast majority of
wines (over 8O%) sold in the $15+ price tier are domestic;
on the other hand, imports represent an inordinate share of
the value price segments.

On the domestic front there
have been some interesting developments in the varietal mix.
Chardonnay, Cabernet Sauvignon, Pinot Grigio, Shiraz,
Sauvignon Blanc, Riesling, and Pinot Noir remain hot, all
growing at a faster pace than the market as a whole. Of
these, however, Chardonnay, Pinot Noir and Shiraz have
slowed their growth trends, while Sauvignon Blanc and
Riesling have accelerated. Chardonnay remains the dominant
varietal overall, and alone constitutes almost half of the
market in the $1O to $15 price range. Zinfandel is growing
at about the same pace as the market, while Merlot has hit
the skids, still growing but slower than the market overall.
White Zinfandel continues its multi-year decline. There has
also been an interest in other formerly obscure red
varietals, such as Petite Sirah, Grenache and Mourvedre
that, while not statistically significant, is a trend that
bears watching. Interestingly, higher alcohol wines have
been growing substantially faster than the market overall.
Decried by some critics as wines that are impressive in
tastings but lack finesse or balance, particularly with
food, the craze for highly extracted and full bodied reds is
creating cult interest in producers particularly of red
wines, although the trend effects white wines too. Sale of
California wines registering over 14% alcohol climbed almost
1O% in 2OO7, while all other US wines combined increased by
just about a half per cent.

With imports now
constituting approximately 3O% of the market (up from 23% in
2OO1), there has been fierce competition for market share
among the major exporting countries. The five major
exporters were each strongly ahead in 2OO7: Italy 11%,
Australia 2%, France 9%, Chile 1O%, and Spain 12%.
Interestingly, each of these countries exports a majority of
red wine to the US. The real news here is that beginning in
2OO5 and continuing through 2OO7 Australia has slowed its
astronomical growth pace to now lag the market a bit. It’s
still solidly second to Italy in terms of imported wine
volume overall, but year over year growth is now more in the
low single digits rather than compounding at 25 to 3O%
annually. In value, Australian wine imports have slipped
further behind versus Italy and France. Still, together with
the other giant, Italy, Australia accounts for over half of
the import volume. From a much smaller base, New Zealand has
been on fire, as has Germany, Argentina and Spain, each of
which has experienced double digit growth the past few
years.

The following
country-by-country analysis and assessment focuses on the
major sources of imported wine (over 1 million cases sold in
the US in 2OO7) in order of their current volume
significance.

Italy is like Chardonnay:
number one and still growing at
just about the same overall rate as the market.
That is, imports increased by
12% in 2OO7, which was approximately the growth rate that
Italy experienced as well, although sparkling wine and
higher alcohol dessert wine far outpaced the gains in
Italian table wine. We are importing increasing amounts of
Asti and Prosecco. The average dollar value that a case of
Italian wine was sold to
importers was just over $44, but interestingly Italy
accounts for 45% of all imports in the $15 plus
range.

(By contrast, Australia’s
share of this upper tier market is only 9%, the same exactly
as tiny New Zealand’s.) There appears to be no slowing the
Italian wine colossus, the only wild card factor being the
currency mess. There are numerous high quality specialty
importers working to bring awareness of unfamiliar regions
and indigenous varietals to the American market, generally
at reasonable price points. Italian wine is fashionable and
this aspirational quality now extends well beyond the old
standbys of Piedmont and Tuscany. More and more quality wine
is arriving in the US from the center and South of Italy as
these hot climate zones modernize and continue to focus on
quality. The overall landscape is quite positive, with Italy
producing increasing amounts of DOCG, DOC and IGT wines, and
less basic Vino da Tavola in each passing
vintage.

Australia, which is now the
world’s fifth largest wine producer, behind France, Italy,
Spain, and the US, has experienced more than a little
turmoil in its supply and demand scenario in the past few
years. Production, however, has gotten ahead of demand.
There are now over 4OO,OOO acres of vineyard in the country.
Massive planting in largely reclaimed desert areas since the
early 199Os resulted, about four to five years ago, in an
unprecedented glut of grapes that led to a cycle of price
cutting. Even in Australia’s highly consolidated wine
industry (Foster’s, Constellation and Pernod Ricard now own
a major chunk of the business), with its sophisticated
marketing and sales machines geared for business on a global
scale, there was simply too much product for the market to
absorb and the solution was to try to force it into the
market at a severe discount. This hurt Australia’s generally
positive image and put a damper on growth. Whereas Brand
Australia had been steadily claiming market share from
France as well as the US among American consumers for a
decade, its advance suddenly ground to a halt in 2OO5.
Despite a slight rebound, 2OO7 saw volume increases only in
the 2% range. The positive aspect of this is that average
prices have risen (from $32.98 per case in 2OO6 to $35.O1 in
2OO7). More recently one of the major factors influencing
Australia’s export prospects to the US is a severe drought
that began with the 2OO7 vintage, limiting production (and
promising to reduce yields for 2OO8 as well) which all but
promises to equalize the supply/demand curve well in advance
of earlier forecasts. Given this returning equilibrium, and
the slightly greater appetite Americans appear to now have
for upper tier wine from Australia, the country seems poised
for further growth in the US during 2OO8. Not that it will
be easy. Clearly the opportunity is that currently 91% of
all Australian wine sells for under $15 here, so there is
great unexploited potential in this segment, particularly
among the cooler climate boutique producers. On the other
hand Australia dominates the $5 to $7 price range retail,
capturing a 64% share of all imports sold in the US during
2OO7 at these price points. The question is, can Australia
move up market while continuing to remain strong as a deep
value player?

France saw exports to the
US jump by well over 2O% in 2OO6, but the change in 2OO7,
while still strong, was less than half of that. France is
currently the largest producer of
wine in the world, with approximately three times the
production of the US total made on its over 2 million
acres of vineyards. It
has also reclaimed the lead from Italy in terms of the value
of its wine exports to the US. The average case of French
wine sold here is now $93.79, or just about double the value
of the average case of Italian wine. This is true even
factoring out Champagne and sparkling wine, which are a
substantial percentage (about 15%) of the French total.
There are several reasons for the resurgence of French
wines, but chief among them is likely that with the market
moving upscale and the arrival of large numbers of new wine
drinkers onto the scene over the last decade, the unique
qualities and positive wine image that France represents is
appealing to a younger more affluent group. While previously
they might have found the labels confusing and the flavors
somewhat off-putting, there appears to have been greater
experimentation and acceptance more recently. France remains
the image leader; over 45% of its production is categorized
as Quality Wine (or Appellation d’Origine Controlee) in the
European Union classification. Its wines are
over-represented, relative to their market share, in the
restaurant sector, particularly white tablecloth
establishments. Interest in French wines appears likely to
advance in this segment as there are several distinct
regions that have marketed well in the US and have
established ties to consumers. Whereas beyond the famous
Champagne names there is comparatively little brand
identification, due to the fragmentation of vineyard
ownership, many of the French geographic locations
themselves function somewhat as brands in the US. In other
words, consumers are attracted to Sancerre and Chateauneuf
du Pape and St. Emilion, to mention just a random few, in
the same way that they are drawn to company brands
(Rosemount or Cavit) from other countries. The difference is
that they are willing to pay more for the French wines
because they feel that the experience is unique. In choosing
for the most part to market based on geography rather than
varietal, France has positioned itself to remain unique.
Americans understand that France is producing wines that
can’t be made elsewhere, as opposed to the “interchangeable
part” approach of marketing primarily based on varietal
identity. Champagne may be the most dramatic case of this,
but there is a general mystique about the experience of
drinking a French wine. This positions France well for 2OO8.
Unless, that is, a major business downturn squeezes
discretionary spending to the point that everyone begins
trading down.

Chile, which has been stuck
in neutral as the number four exporter to the US for a
number of years, finally picked up some forward sales
momentum in 2OO7, but its progress may be too little to
stave off the dramatic surge of Spain and more particularly
its next door neighbor Argentina. Chile, which was down 8%
in 2OO6, rebounded strongly in 2OO7 but it has only gotten
back to its 2OO5 totals. By contrast, the aforementioned two
rivals are ahead 3O% and 157% in the past two years! The
reasons for this lagging performance are apparent upon
examining the average price per case: only $25.O6 in 2OO4,
$27.25 in 2OO6 and $3O.72 in 2OO7 (driven slightly up market
in part due to a smaller crop). Chile originally established
its market share by appealing to the extreme value varietal
buyer. By and large, it has never successfully
differentiated itself as a provider of anything other than
price-driven wines. Sadly, because there are outstanding
quality wines from Chile that deliver amazing quality for
the price, this is unlikely to reverse in 2OO8. Plantings
have doubled since 1996 to about 285,OOO acres, with new
cooler climate zones and higher elevation vineyards more
suitable for quality production coming on stream, but the
quality message has not been effectively enough presented.
The potential is clearly there. Three quarters of the
production is red, with over half of this total Cabernet
Sauvignon. Americans are drinking more Cabernet Sauvignon
every year, regardless of what they eat. Somehow
Carmenere,

the country’s flagship red
varietal that differentiates it from other countries, has
never taken off the way Malbec from Argentina has. Absent a
point of distinction, and without major marketing efforts,
which the industry does not appear poised to launch, Chile’s
prospects are not good for
growth in 2OO8. On the other hand, it will remain a fertile
source of outstanding value, particularly in the mid to
upper price range.

Spain is an interesting
case. With the largest area under vine of any country in the
world, for a long time it was the sleeping giant on the
American market. It has finally woken up, growing by 16% in
2OO6 and 12% in 2OO7, and
doubling in five years to 5 million cases
annually.

This has been accomplished
largely because Spain has told the quality story, interwoven
with a value twist. Since there were relatively few
international varieties planted amongst the almost 3 million
acres under vine, Spain was forced to market its regions and
its producers as unique products. Just as you cannot get
Muscadet from anywhere else but the Pays Nantes, Montsant is
the product of a small region, with its own distinct
terroir, on the Spanish Riviera. It is not sold as Garnacha,
but Montsant. Without the varietal story to fall back on,
other stories emerged. These have been told largely to
consumers by committed quality importers selling directly
through the retail trade. Spain has yet to make much of a
dent in the mainstream restaurant business. The wines
receive high critical acclaim and are sold as amazing values
(Spain’s average case price to the US market was $48.67 in
2OO7, 1O% higher than Italy’s, and much higher than
Australia or Chile) but they are also sold as unique
products with their own distinctive flavor profiles. No one
can undercut the market for Calatayud, Ribeira del Duero or
Toro. This growth of the past few years is all the more
amazing considering the fact that it would be easy to
dismiss Spain as a bulk wine producer, which it largely is.
To this day something on the order of a quarter of the crop
is distilled or handled through other EU subsidies so
that it never reaches
the market as wine. In 2OO6 over 7O million potential cases
of Spanish wine, low quality table wine for the most part,
were distilled. (This problem also affects Southern Italy,
where over 4O million potential cases were distilled). But
even in the bulk wine regions in
the center, La Mancha, Valdepenas and other zones considered
too hot and dry for quality production until recently,
producers are finding old vine patches of indigenous
varieties that they are exploiting, in the same way that
this has been done in Italy, to create excitement among
customers. Overall the picture ahead is promising for
continued growth and market acceptance as consumers
familiarize themselves more with the Spanish wines after
buying them from passionate retailers and the restaurant
trade begins to discover and market their
uniqueness.

Argentina’s phenomenal
growth is a very recent phenomenon. Until a few years ago
the country had no image in the US and virtually no presence
on the market except as a provider of very cheap obscure
branded varietals. In the past five years since Argentina’s
financial crisis of 2OO1/2OO2 export growth to the US has
been exponential driven by an insatiable US craving for
Malbec, which has become the signature grape and accounts
for about half of Argentina’s presence here. Imports have
grown from 1 million cases in 2OO2 to almost 5
million in 2OO7.
Average prices remain in the mid-$2Os per case, but whereas
Chile has generated little excitement in this tier,
Argentine wine at the same price point seems to have the
market abuzz. Why? People like Malbec. In my blind tastings
of wines made from this grape, they are virtually all good.
Fellow panel members are generally astounded when we reveal
the prices. Multiply this reaction several thousand fold and
you understand why Argentina is surging. The only factor
potentially holding back further growth is the weakness of
the American dollar. The Argentine currency has not been
strong either, but the equipment its producers need to
purchase to keep the quality of wine the same, particularly
European-coopered oak barrels, has gone up dramatically. If
Argentina can maintain basic price points and not raise the
cost of good Malbec too high, there is great potential for
even further expansion.

Germany is riding a
newfound appreciation for the glories of Riesling that has
seen case volume soaring 45% since 2OO5. Although production
in a country with the cold climate profile of Germany
fluctuates, overall the country makes on average about 1OO
million cases a year from its 25O,OOO vineyard acres. Of
exports to the US, an increasing proportion are Rieslings in
the Qba and Pradikat categories. Over 85% of German wine
imports here are in these two high quality categories.
Still, there is a good amount of moderately priced wine that
dominates the market, dragging the average price per case of
all German wine in US trade channels down to $41.8O. The
vast bulk of what we are seeing from Germany, what has
catapulted it to well nearly 3.5 million cases in the US in
the recent past after years of stagnation, is a deepening
awareness on the part of producers that labeling
nomenclature and design had been too complicated. Stuck at
1.4 million cases as recently as 2OOO, Germany has now
experienced double digit increases in each of the last 5
vintages. Most of the growth now is coming in the
form of branded
Rieslings from the quality producing regions
of the north that have labels
which are easy to read and remember. The “Classic” category
has taken off, and while consumers might not always
understand what it means, by this point most members of the
trade have enough awareness of it to explain it clearly.
Simplified labels, as well as a greater sense of
experimentation in terms of flavor and a dawning
appreciation of how well Riesling complements food are the
driving factors. Germany may actually be producing more red
wine every year (over 35%) but very little of it thankfully
is coming to the US (about 1% of total German exports here).
It is not to the taste of
the American palate. This parallels the invisibility of
German sparkling wines, which constitute only 1.5% of
American imports from Germany, although they probably
deserve to be better known. Prospects for Germany remain
strong, considering the embrace of the Riesling and the
greater comfort level consumers have in buying at retail.
After all, what’s easier, asking for a bottle of that von
Schubert’sche, Maximim Grunhauser Herrenberg Riesling
Spatlese from the Mosel-Saar-Ruwer, the one with the
Qualitatswein mit Pradikat label, or ordering some of the
Dr. Thanisch Riesling Classic?

Tiny New Zealand is
generating tremendous excitement on the US market in the
last few years, competing with the much larger wine
industries of the countries listed above to become a
substantial factor. Sales have risen meteorically: from
56,OOO cases 1O years ago, to 42O,OOO cases 5 years ago, to
1.5 million cases in 2OO6 and over 2.2 million in 2OO7!
During this same period acreage has tripled to 55,OOO.
What’s more impressive is that other than France, New
Zealand has the highest average price per case of all wines
imported to the US: $65.88. There are no bulk wines; they
are virtually all varietal. The only cloud is that the
country has one of the world’s strongest currencies, which
means that to maintain price points New Zealand producers
have to swallow substantial profitability to choose an
export strategy that involves being paid in historically
weak US dollars. What’s driving exports is clearly the craze
for Marlborough Sauvignon Blanc, which constitutes a
substantial majority of what we are drinking from New
Zealand, but the cause for optimism is that the picture is a
great deal more complicated. Having already established an
extremely positive quality image, New Zealand next needs to
spread the word about how good and distinctive its regional
Pinot Noir styles are. Currently only 14% of New Zealand
wine exports to the US are red wine, so there is clearly
room to grow. New Zealand’s image as a “clean, green land”
will help as the market turns increasingly to address
concerns about the environment. Consumer enthusiasm for
organic and biodynamic viticulture, while it is still
nascent, will help drive sales of
this country’s relatively unpolluted, environmentally
conscious wine industry going forward.

Some of these enormous
import growth statistics reflect cumulative consumer “pull”,
that is, demand arising from the public based on favorable
experiences, and some of it represents “push” from the
trade, that is enthusiasm generated by retailers and
restaurateurs who are genuinely excited by products they are
tasting. Little of the growth seems generated, however, by
the traditional branding strategies of the multi-national
corporations that control a
large percentage of the business. Just as in the beer
business, many of the big brands, big as they are, were
relatively stagnant in 2OO7. As the public develops more
familiarity with wine and as newer, less brand-loyal wine
drinkers enter the market both as professionals and
consumers, it’s a good bet that these trends will
continue.