Wine 2005 Examined

The
Year in ReviewTrends & Projections

The mood in the
industry, fueled by growing consumer excitement, is upbeat.
Having successfully weathered a number of lean years where
discretionary spending was down, overall economic confidence
weak and unemployment growing, wine has proven its staying
power. Put succinctly, a broader array of people than ever
before are drinking wine and spending more on their
purchases. The strong, almost uninterrupted sales and per
capita consumption increases of the past fifteen years,
particularly in the Table Wine (the kind most people drink
with dinner: not over 14% alcohol, not sparkling) category
have shown no signs of abating, bolstering long-term trends
favorable to increasing profitability. Prices, however, are
rising. Large-scale inventory backups, radical discounting
and difficulty in selling wines over $2O retail, which
defined the market just a few years ago, were but distant
memories in the super-heated wine environment of
2OO5.

If it seems
almost everyone you know is suddenly discovering wine, they
may well be. Per capita table wine drinking among adults in
the US has leaped 47% since 199O, from 1.9 gallons to 2.8
gallons, dramatically outpacing the rate of every beverage
category other than bottled water. (During this same period,
distilled spirit per capita consumption has declined 12%
among adults and beer has declined almost 11%.) But the
biggest news is that for the first time ever polls are
indicating that wine has surpassed beer to occupy the lofty
position of most favored drink among alcoholic beverage
consumers. In other words, when asked by the Gallup
pollsters which category they preferred, Liquor, Beer or
Wine, more respondents chose the latter. Wine’s newfound
popularity is especially strong among women nationwide, and
it cuts across all age groups, although there is an
especially powerful trend drawing people in their twenties
into the fold. This is the first generation in American
history to so eagerly embrace wine in such large numbers.
Perhaps it’s because wine does not seem so foreign to these
“millenials”, as they are dubbed. They are more likely to
have grown up in a household where wine was an everyday
presence, either as a cocktail or with dinner. This group is
less formed in its taste, less influenced by advertising,
and willing to spend more money per bottle than previous
generations. Their primary concerns are quality and flavor.
To be sure, they drink beer as well, as the malt industry
remains several times larger in total volume and overall
sales than wine, but this is because statistics show wine
drinkers tend to drink less frequently and in more moderate
quantities.

Another
inescapable conclusion of recent studies is that American
consumers overall have become more versatile, even
experimental, in their preferences. Rather than becoming
more set in our ways as the wine drinking habit takes hold,
more “brand loyal”, we’re actively venturing out. In a
comprehensive poll of consumer attitudes conducted by the
Brown Forman Wine Company (the “Brown Forman Tracking
Study”), 4O% of the women answering agreed with the
suggestion that they like to try new brands and types of
wines, and 43% of those in the 21 to 34 demographic did so
as well. This same research report indicated that when
buying wine at retail, fully half the consumers don’t even
know what varietal or type they are looking for until they
actually reach the store’s premises! This openness is less a
sign of unfamiliarity as it is an indicator that the buying
experience is looked on as an adventure. Less than a fifth
of consumers who responded to the study decide which country
or place of origin the wine must be from that they are
looking for prior to entering a retail store, so they’re
open to options that they might not have even considered
beforehand. This is fueling growth in categories of imported
wine from obscure regions and unknown varietals that could
not have been predicted even five years ago. Perhaps not
surprisingly, among people aged 21 to 34 this willingness to
experiment extends to a high percentage saying they choose
the color (4O%), the varietal or type (58%), the brand
(74%), and even the price range (61%) of the wine only after
entering the retail shop. As marketers well know, many are
drawn to items that are displayed prominently or chilled
because they are easy to buy, not necessarily because of an
overwhelming attraction to these particular products. Over
9O% of all consumers say that word of mouth, or personal
recommendations, are the main source of information they
trust regarding their wine purchases. This is telling.
Direct personal contact, with a peer or an “expert”, is the
primary factor influencing sales. Everything else only works
in its absence.

Restaurants are
a particularly fertile source of experimentation. The
increasing popularity of wines by the glass, which allow
product trial without the commitment of buying an entire
bottle, is an attractive option to most restaurant-goers.
Even among those who regularly spend $2O or more per bottle,
the majority order glasses of wine half of the time; among
those spending less, the percentage approaches 8O%,
according to the Brown Forman study. Another research
organization, Technomic, found in 2OO5 that fully 62% of
consumers are willing to try a new wine when they are in
restaurants, and a report by Roper ASW indicated that 22% of
survey respondents said they were always looking for
something new when it comes to wine. Based on comparative
data, all of these trends intensified in 2OO5 and
extrapolating outward, there’s little reason to assume that
openness to what is new and unfamiliar, as well as
willingness to buy what is recommended or displayed, will
only continue to grow. The imagination and creativity of the
retailer or restaurateur, their commitment to training and
education, will remain the only limiting factors going
forward.

The mosaic of
consumption became even more diverse in 2OO5, with the
several yearlong trend toward imports growing further. This
was perhaps more understandable when the dollar was dominant
in the ‘9Os, but it’s remarkable given the weakness in the
currency since at least 2OO1. From its peak, the dollar has
lost close to 5O% of its value against the Euro, not to
mention similar declines against other trading partners, but
during this period the volume of imported wine on the US
wine market has continued growing apace, leaping over 8O% in
5 years, compared to an increase of less than 1O% in
domestic wine. 2OO5 has seen growth of approximately 8% in
imported table wines, which now represent a quarter of all
wine consumed in the US, but the surprise is that Australia,
the greatest success story of the last decade (with an
increase of 423% in just five years!), despite challenging
Italy for first place, has grown at a much slower rate than
the category overall. On the other hand, Spain (up
approximately 15%), New Zealand (75%), Argentina (41%),
South Africa (19%), and Germany (16%) have been leading the
charge, with significant double-digit increases off of a
much smaller base. This represents the wine trade searching
for quality and value and finding it rather than any impulse
among consumers to experiment for its own sake.

One of the more
interesting developments among imports in 2OO5 is that
Australia actually surpassed Italy for lead position in the
still wine category, by far the largest segment in the
industry, although if we add Vermouth and Sparkling wine
(which Australia exports insignificant quantities of to the
US) back into the equation, the Italians retained a slim
lead. This amazing development was entirely fueled by the
spectacular popularity of Yellow Tail. The Yellow Tail
phenomenon is so remarkable because of the brand’s meteoric
ascent. From an idea launched with modest sales projections
in 2OO1, it became the number one imported brand in the US
by 2OO3, where 85% of the production goes. The approximately
6.5 million cases that Americans bought of this wine in 2OO5
is more than we purchased from any other countries besides
Italy and France! But higher priced Australian wines,
particularly Shiraz, continued to extend their popularity in
2OO5. Without question, the influence of major wine
reviewers who rated the wines highly have helped legitimize
this category. Going forward the average price of Shiraz is
likely to continue climbing as we discover how good wines
from specific appellations, such as Barossa, McLaren Vale
and the Limestone Coast are, despite their higher price
tags. Also on the imported wine front, the New Zealand story
has been equally amazing in its own way. US imports have
grown 14O% in just two years since 2OO3 based primarily on
the enthusiasm for the country’s Sauvignon Blanc. This can
only grow, but it’s very likely that the country’s great
Rieslings, Pinot Noirs and perhaps even Chardonnays are
going to attract more attention here as well. The only major
country whose bottled table wine exports to the US has
declined is France (down less than 1%), although once
sparkling wines are considered 2OO5 has actually seen growth
in the French wine segment by about 2%.

Restaurateurs
finding better bargains than in American wines of comparable
price fueled some of the growth in imports, but much of the
increase was retail-driven. Spain is an instructive case.
The viticultural picture there is changing so quickly, with
new regions and wineries within them emerging on a yearly
basis, that the public has had little time to gain
familiarity. Although there is a general thirst for more
widespread knowledge about wine, most consumers have neither
the time nor inclination to register for a course, read a
book or even a magazine article. Fully 2O% of wine consumers
under the age of 35 have visited a wine-related website at
least once over the past month, according to a 2OO5 poll,
but the vast majority make their buying decisions based on
factors other than information they gather about wine from
printed or on-line media. Grape variety and price remain the
major determinants of what people buy if left to their own
devices. Knowledgeable retailers, on the other hand, who are
passionate about a particular category of wine, have
increasingly found customers willing to buy bottles, and
then cases, based on their recommendations. Especially if
the category represents eye-opening value, as does much of
the Spanish wine we import – the fact that it has no
varietal identification appears not to be a major stumbling
block. The scenario is that retailers scoop up 2O cases of
some outstanding wine brought to them by a specialty
importer from some obscure previously unknown region, say
Emporda Costa Brava, Montsant or Campo de Borja, they tell
their best customers what a bargain it is, and within a
short period of time it is gone. The next time they buy 3O.
This word of mouth excitement has propelled Spain to
significant growth, but it has also helped previously
difficult to market wines from Germany, Italy, Austria,
Argentina, and even certain value regions of France to new
heights. Spain will continue to be a powerhouse, as long as
prices remain reasonable. Look for wines from Southern
Italy, Roussillon, the Loire and Rhone Valleys in France,
and perhaps Portugal’s Douro Valley to find broader market
niches in the future. This interest in what’s hot is the
same phenomenon that has seen increased demand for Rose,
once a hopelessly moribund category. Based largely on
quality European imports, a good part of the Rose phenomenon
is restaurant-driven and seasonal, although retail-fueled
enthusiasm has also helped expand the category. Sales of the
most widely produced Rose, White Zinfandel, continued its
long, slow, but steady decline (down 2% in 2OO5).

And speaking of
colors, what else was hot in 2OO5? Red. Especially Pinot
Noir. The much-documented “Sideways” effect continued
throughout the year, with Pinot sales climbing and many
wineries experiencing drastic supply shortages.
Interestingly, however, the movie’s bete noir, Merlot, did
not suffer any sales losses whatsoever; it may be out with
the cognoscenti, but consumers are still buying at a record
pace. Part of the popularity of Pinot should also be
attributed to opinion leaders within the industry who have
been complaining about over-extracted high alcohol red wines
for some time and advocating that people try lighter reds,
although the popularity of California Zinfandel and Petite
Sirah did not appear to suffer in the face of this
criticism. Grenache, or Garnacha, began to emerge from the
shadows in 2OO5, as consumers grew increasingly aware of its
incredible quality potential, in places as diverse as
Priorat, the Rhone Valley and Australia, assuming that
yields are controlled. While the grape probably will not
ever reach the heights of Shiraz in popularity, people will
continue to discover it. Even its southern European
stablemate, Carignan (or Carinena) may attract increasing
interest. But the real sleeper poised to explode for 2OO6 is
likely to be Malbec, particularly from better estates in
Argentina. The wine it makes is too good to be kept secret
much longer. As we embrace flavor, in wine as well as our
love affair with creative cuisine, red wine made from grapes
with strong personalities like this have been the
beneficiaries. Overall this was the year that red wine sales
finally squeaked past white in the US for the first time
since the mid ‘7Os when the consumption base was much
smaller. The red wine trend can be traced to another media
event, the airing of the famous 6O Minutes “French Paradox”
segment in 1991, which strongly suggested that red wine had
certain potential health benefits that have now been
documented. At the time Americans consumed less than 15% red
wine.

This is not to
say that white wine is dead. Far from it. Chardonnay remains
the number one variety of all sold in the US, and it lost no
ground in sales in 2OO5. Increasing dramatically, however,
has been interest in Pinot Grigio and, to a lesser extent,
Pinot Gris. This variety remains the most popular category
of imported varietal wine other than Chardonnay
(approximately 7 million cases, virtually all from Italy).
The surprise undercurrent of interest in Riesling has caught
some industry leaders off guard. Still not statistically
significant, it is fueling much of the growth in the German
wine category, although Australia’s Clare Valley and the
Marlborough district of New Zealand attracted critical
attention as well. I would be less sanguine about the
potential of those other “underground” wine categories of
the past few years: Gruner Veltliner or Viognier. Neither
variety seems to have enough innate flavor to sustain much
long term commitment among consumers here. Note that 2OO5
continues the long march of the American consumer, whether
it is red or white wine they choose, to the embrace of the
grape variety itself. This is the great democratizer of the
wine business, putting inexperienced consumers on a
relatively solid footing when asking for a bottle of wine.
European wine named after its place of origin, which forms
the basis for the whole French Appellation Controle e system
(other than wines from Alsace) continues to baffle all but
the most committed wine enthusiasts. This is true although
there are counter trends keeping attraction to these wines
alive and strong, primarily among a more limited number of
professionals and interested consumers.

Another aspect
of the wine scene that accelerated in 2OO5 was the average
price that consumers were willing to pay for a bottle.
Studies have shown that younger consumers, in particular,
those are just discovering wine and are attracted by its
“cool” lifestyle connotations, are less price conscious when
shopping for wine. Other factors tend to enter the equation
more for them than those who are over 5O. According to a
recent report by Vic Motto of Global Wine Partners and MKF
Research, entitled A New Era of Growth for the U.S. Wine
Market, “Now, for the first time in history, sales of wines
over $15 per bottle have grown to become the largest revenue
segment of the US wine market.” This has become true despite
the fact that these more expensive wines only represent
about 1O% of the volume. They are significantly more
profitable, however. Revenues in the wine industry, Motto
points out, have grown at twice the rate of volume, or case
sales, for quite some time. Profitability in this more
expensive tier of the business has fueled further
investments in quality as well as spurring intense
competition. Big business, to put it bluntly, has been
getting bigger. 2OO5 saw an intensification of the
inexorable merger and consolidation activity that has
characterized the American, and global, wine business at all
levels for years. The most earth-shattering changes were the
sale of Robert Mondavi Winery to Constellation brands, and
the sale of Southcorp, which previously controlled over 35%
of Australian wine production, to Fosters, owners of the
giant Beringer Blass Wine Estates – more brands in the hands
of fewer commercial entities. This year US wine labels that
produce over 1 million cases accounted for close to 8O% of
the domestic wine market.

There has been
consolidation not only in the supply and distribution sector
but also in the retail sector. Multi-unit restaurants are
taking a larger share of the business nationwide, as are
multi-unit retail stores in states where the regulations
permit the holding of multiple licenses. In states where
supermarket or price clubs can own as many licenses as they
want, these businesses completely dominate the sale of wine,
a process that accelerated in 2OO5. Nationally, well over
half of the wine sold at retail comes through a supermarket
or price club. But this does not mean that the role of the
independent wine merchant is disappearing. Just as there is
room for the specialty importer, the boutique distributor
and the freestanding privately chef-owned restaurant, the
retail segment also has a significant niche for the merchant
who is selling premium products. The distinction between
commodity wines, technically sound but without much
individuality of flavor, and those which are differentiated
by special attributes continued to grow in 2OO5 and is a
trend that will keep accelerating, supporting the specialist
in each of the tiers of production and distribution because
these are the products that a growing segment of the public
is buying. They also happen to be the products that generate
the most profitability per unit.

For this reason,
another possible result of the consolidation in the wine
business we saw in 2OO5, the potential threat it poses to
obscure wines from unknown grape varieties, is less than
likely to materialize. In a market that has proven it will
pay for quality, with an army of committed retailers and
restaurateurs who are interested in supplying that market,
and may even feel a greater need now than ever to
differentiate themselves from larger scale enterprises that
may be less equipped to provide the same level of diverse
selections, there is little likelihood that the wine world
will become one dimensional. While many of the larger firms
may be narrowing down their portfolios to include only the
proven winners, entailing a smaller menu of grape varieties,
companies of any size with educated staff members continue
to expand the range of offerings available so that there’s
actually more diversity now than ever before. While the
onslaught of the grape variety, and even more so of wines
that express strong fruit characteristics, continues to lead
the market, there is room also for the counter trend: the
quirky, obscure, even earthier styles that are produced in
less familiar regions. Just as New Zealand has recently
become somewhat of a mainstream source for wine, in 2OO5
Austria began appearing with more regularity on wine lists
and retail shop shelves. And “Terroir”-driven wines from
France, those that completely eschew the “international”
style of winemaking stressing strong fruit expression above
all else, continue to have strong adherents, particularly in
the fine dining context. Whether representing a blend of
grape varieties or not, they may be harder to market, but if
they are awarded high ratings in the press there is no
problem selling them. And the press tends to love these
wines. For instance, despite the overwhelming tilt of the
market towards varietals, the Wine Spectator’s famous Top 1O
list of wines for 2OO5 included 6 that were not strictly
identified by grape variety. But the bigger trend that
continued in 2OO5 was the popularity of wines that were both
varietal and reflected the terroir of a specific place.
Consumers may have showed overall interest in Pinot Noir,
but the savviest among them proved they were willing to pay
more for wines from the Santa Lucia Highlands, Santa Rita
Hills, Russian River Valley, or Willamette Valley. Going
forward, these will be the folks who seek out Dundee Hills
or Central Otago on Pinot labels, not to mention Mercurey or
Savigny-Les-Beaune. The same interest in the local and the
unique has continued to drive our awareness of previously
obscure districts for other varietals as well. Red Mountain
Syrah anyone? Walla Walla?

A final trend
that picked up momentum in 2OO5 and shows no signs of ever
turning back: the conversion from cork to screw cap.
Virtually all of the Marlborough Sauvignon Blanc sold in the
US was bottled in screw cap. One of the lone holdouts, the
iconic Cloudy Bay Winery, will be converting for their 2OO5
vintage, released in 2OO6. Clare Valley Rieslings, many
wines from Oregon and Washington, and increasing numbers of
California varietals are bottling in screw caps now,
convinced that this form of packaging protects their wine
better from spoilage. Even some far-sighted French
producers, generally the most traditional, are using screw
caps. The previously mentioned Brown Forman tracking survey
revealed that 6O% of the consumers who participated
indicated a willingness to try wine packaged in a screw cap,
including 63% of the youngest age group. Interestingly, this
study has shown that in the past year among the growing
number of people who spend $2O or more on a bottle of wine,
the percent who associate screw caps only with cheap wine
has fallen from 53 to 39%. This is the most significant
change, because many industry insiders feel that the only
factor holding back a mass transformation of the industry to
screw caps is the lingering fear that too many consumers
have negative feelings about them. It probably won’t happen
this year, but probably within the next five some of us will
begin to express surprise and displeasure if we’re sold
certain types of wines in cork-finished bottles.