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Big Wine strikes again

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Big Wine

“Who do we want to buy next?”

That E&J Gallo bought J Vineyards, the highly-regarded California sparkling wine producer, last month was shocking, but it did make business sense. Gallo, for all its vastness, doesn’t make high-end bubbly and doesn’t have many successful restaurant wine brands, and J does and is. Plus, J owned 90 acres of prime Sonoma vineyards, making the deal even sweeter for Gallo.

So how to explain this week’s news that The Wine Group, second-biggest to Gallo among U.S. producers and with even less of a critical reputation, bought the fiercely independent and much beloved Benzinger Family Winery? The Wine Group has never shown any desire to make wine not sold in grocery stores, and its two biggest brands are Franzia and Almaden, the five-liter box cash cows.

Call it one more step in the Big Wine-ing of America:

The increasing consolidation in the U.S. wine business, something I wrote about at the beginning of the year. It is getting harder and harder for wineries that make less than one-half million cases to find distributors and space on store shelves. Benziger makes less than 200,000 cases a year, which wouldn’t even make it the biggest producer in Texas, and J sells only about one-third of that. Said the owner of a leading California independent: “My guess is that a winery really needs to be above 200,000 cases to really get the attention of a distributor. But maybe 500,000 is the new 200,000?” A distributor told me: “There are too many labels fighting for too few spots on the shelf or wine list. It’s crazy.”

• Family and independence, two hallmarks of the California wine business since the 1980s, aren’t enough anymore. These are just the latest sales involving long-time family wineries, which saw an opportunity to cash out to avoid succession problems, solve family disputes over winery operations, or to take advantage of Big Wine’s deep pockets. Sale prices weren’t disclosed, but one report said the J deal may have been worth as much as $90 million, which would make the Benziger price well into the hundreds of millions of dollars. Even of the sale price was half of that for each, which is probably more accurate, that’s a winning payout.

• It’s all about the land. Benziger, with sales of less than $10 million, is so small compared to the multi-billion dollar Wine Group that there is almost no way it could affect the parent’s financial performance. This makes the deal even more baffling, unless it was for the 200 or so acres of quality Sonoma vineyards that were part of the sale.

Will Big Wine run their new companies successfully? Certainly, if success is defined by profit. Otherwise, expect the new owners to do what new owners always do, despite best intentions and protests to the contrary — cut costs, eliminate unnecessary products (so say good bye to J’s lovely pinot gris), and “rationalize” operations. Gallo and The Wine Group won’t ruin J and Benziger the way Sears destroyed mail-order clothing retailer Lands’ End, but they won’t be the same wineries they were before the sale. That’s something we’ll have to learn to live with, because consolidation is going to be with us for a very long time.

More about Big Wine:
How to buy wine at the grocery store
Downton Abbey claret — wine merchandising for dummies
Big wine tightened its grip on the U.S. wine market in 2013

Sweet red wine to merlot: Drop dead

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sweet red wineGrocery store merlot’s reason for being is that consumers like its fruity taste and that it seems sweet even though it’s dry. That combination, plus the fact that these wines have little in the way of tannins, translates to “smooth,” the ordinary wine drinker’s favorite descriptor.

So what are we to make of the news that grocery store merlot sales tanked in 2014, while those for sweet red wine went in the opposite direction?

Call it a sign that we may be seeing the beginning of a seminal change in the U.S. wine business.

One year’s sales figures do not necessarily make it panic time for merlot. But it is worth noting that sales of sweet red, which is grocery store merlot without the hypocrisy — truly sweet, very fruity, and no pretense of tannins — rose seven percent last year, according to Nielsen, while merlot (from a much larger base) fell six percent. Zinfandel, meanwhile, which mimics merlot’s sweet fruitiness, also suffered last year, with sales falling two percent.

This should give the wine wise guys something to ponder, no?

A couple of caveats: Sweet red is included in the red blend category, so some dry wines are part of that seven percent growth. But most of the analysts I’ve talked to say it’s safe to say that sweet red is behind the increase. Second, though supermarkets account for 42 percent of all the wine sold in the U.S., it doesn’t include two key states, New York and Pennsylvania, where grocery stores aren’t allowed to sell wine.

Third, people have been predicting the end of merlot since “Sideways” in 2004, and merlot has always proved them wrong. The difference this time is that sweet red offers much that pinot noir, the “Sideways” merlot-killer, didn’t. It’s less expensive and it’s much easier to make, since it’s a blend and the grapes in it don’t matter to most wine drinkers. Plus, it’s easier to market and sell; witness the success of E&J Gallo’s Apothic Red and The Wine Group’s Cupcake Red Velvet, which didn’t exist until a couple of years ago and today are brands that everyone else seems to be copying.

My guess? This may well be the beginning of the end of merlot, at least as it’s sold as a varietal in supermarkets. Merlot certainly isn’t going away, and will certainly be used to make sweet red. And, as the wine business continues to evolve into two parts — a huge, Big Wine-dominated mass market, and a smaller, independent retailer-driven market — merlot will remain important to the latter. But at some point in grocery stores, there may be little difference between a wine like Apothic and Charles Smith’s Velvet Devil merlot, which is sweet red in everything but name.

 

Premiumization: Are wine drinkers really trading up?

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premiumizationThat’s the top trend in wine this year, that we’re feeling better about the economy and trading up: Buying more expensive wine than the wine we bought during the recession, moving from $4 bottles to $8, from $8 to $12, from $10 to $15, and from $15 to $20.  The wine business calls this trend premiumization, and the salivating at the prospect has reached epic proportions.

That’s because the wine business doesn’t necessarily want to sell cheap wine — it’s not as profitable and it doesn’t carry the prestige that selling more expensive wine does (a much more important reason than consumers can possibly imagine). Plus, selling cheap wine requires more work. You can move a tanker truck of $25 wine in 20 minutes if it gets a 95, but cheap wines don’t get 95s, the competition for shelf space is ferocious, and most cheap wine is sold by the biggest retailers, who demand the best deals and which makes cheap wine even less profitable.

Hence premiumization, which some of the smartest people in wine say is here and isn’t going away. I’m not so sure, and I don’t say this just because my livelihood is cheap wine. As I continually remind people, there has never been a definitive study made public that demonstrates that wine drinkers trade up. Everyone just assumes it’s so. But does anyone know a wine drinker who went from Barefoot to Bogle to Hess or Rodney Strong to Silver Oak?

More, after the jump:

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