The Long Road Ahead: The State of the Bulk Wine Market

We’re at rock bottom, but how long will we stay there?

IF ONE HAPPENED TO drive along any road in any of the major winegrowing regions of California in December 2019, it wouldn’t have been difficult to find remnants of unpicked grape clusters ripening—or raisining—on the vines. From Central Valley to Napa, and just about every region in between, the effects of an oversupply were visually evident. In some cases, entire rows of harvested vines stood in stark contrast to unpicked fruit just one row over.

Jeff Bitter, president of Allied Grape Growers, showed a video at the Unified Wine & Grape Symposium of a mechanical harvester picking through rows, dumping loosened berries straight onto the ground and not into bins.

“I have been doing this for well over 20 years and I can honestly say, you don’t see these kinds of pictures very often in the industry. We are in a unique position right now, and not a favorable one,” Bitter said.

The straightforward reality is that the grape and bulk wine market hit the bottom of a cycle immediately following the 2019 harvest and the industry exists in a state of oversupply. The million-dollar question remains, “How long will it last?”

Where We Are Now

In some ways, it’s difficult to pinpoint exactly what this market is, or rather, what it could have been. The 2019 Preliminary Grape Crush Report confirms a smaller-than-average harvest at just 3.9 million tons but, importantly, that number does not include any tonnage left on the vine. Bitter said that as much as 200,000 tons could have been left unharvested. The hardest hit varieties: Cabernet Sauvignon and Pinot Noir.

In prime Cabernet areas, like Napa Valley and Paso Robles, growers sold their fruit for astronomically low prices. This year, it was not uncommon to hear of Paso fruit at $200 per ton, or Napa Valley Cabernet available for $700 per ton. These are the rock-bottom prices: the average price per ton of Napa Cabernet Sauvignon has decreased since 2016 and continues to decline, according to Steve Fredricks, president and partner at Turrentine Brokerage.

“The spot market price dropped some 30 percent to 50 percent from the year before, which was already down from the year before and was well below the district’s average price,” Fredricks said. “As we got through last year, the spot market price for old wine [from 2018 and prior harvests] dropped drastically, which it does after a very large harvest, with the challenging supply situation, and slower demand. If you needed to move Cabernet before harvest, because it turned up a larger volume or even just to get it out of the tanks, you were competing at a California-appellated price.”

It’s much the same story for Pinot Noir, and Fredricks said that one cause for such surpluses is new acreage that has come online. Statewide, the average price per ton for the two main red varieties dropped to new lows: The Crush Report shows the weighted average dollars per ton for both Cabernet Sauvignon and Pinot Noir were lower than that for Cabernet Franc or Mourvédre, for example.

How Did We Get Here?

It would be easy to say that premiumization was the main driver of the oversupply, and that would be fair—to a point. Over the last decade, a great deal of effort was made on behalf of the largest wine companies to acquire prime vineyard land to secure sourcing for top-tier brands. In 2016, Wine Business Monthly reported extensively on moves made by E. & J. Gallo, Jackson Family Wines and other major players to buy land that, for the most part, would produce grapes suitable for $15 and up brands. The grabs were made, presumably, with the notion that the premiumization trend would continue for years to come. We entered into an undersupply situation, and grape and land prices were some of the highest ever seen.

It dovetailed with existing growers and landowners who were already increasing their plantings, and now new entrants were putting in acreage in order to capture those high prices. Those who were replanting were moving to Cabernet Sauvignon, Pinot Noir and Chardonnay—if they weren’t already planted to those varieties—and the use of new technologies and better root- stocks, clones and trellising meant that those additional acres bore more fruit than ever. In addition, Bitter reports, acres were not being removed at the proper attrition rate.

Instead, the lives of some vineyards were extended, and vines stayed in the ground longer than necessary to take advantage of favorable market conditions. As a result, wine companies shifted sourcing to the Northern Interior of California and found value—the quality of the wine was much higher than the price would have suggested in this market. But the grape glut was exacerbated in California’s interior, where there was little to no attrition in some of the highest-yielding acres.

To make matters worse, 2018 was an abundant harvest—the largest seen since 2013, when the results of more abundant planting and new bearing acreage came online. This all culminated in a record 4.28 million tons crushed, according to the California Department of Food and Agriculture and National Agricultural Statistics Service’s annual crush report.

Then signs that the off-premise market may not be as stable as hoped started to show. Consumer demand began to fall off.

Wineries had a lot of inventory to sell through, but heading into harvest, Nielsen reported that off-premise wine sales increased just 0.9 percent in value and 0.3 percent in volume. Sales growth was slowing. Competition from spirits, beer and other beverages—even non-alcoholic beverages—developed and matured and the conversation shifted from uninhibited growth for wine to the threat of alternative beverages.

Worried about sales, wineries didn’t pick up new grower contracts, or renew existing ones, hoping to first offload inventory. Tanks—and shelves— were full, and it was becoming increasingly difficult to move wine, even at the previously coveted higher price points.

This all culminated in the “Great Grape Glut” of today. However, the good news is that the state of the grape supply is cyclical.

Where Does the Industry Go From Here?

Bitter said the only way to solve the issue, particularly in the short-term, is to start pulling out acres. “This isn’t a one-time 200,000 tons long situation,” Bitter said. “We’re potentially going to be 200,000 tons long each year if we don’t make the acreage correction.” That acreage correction amounts to about 30,000 acres in the state, but he also pointed out that those acres need to come off the top of a normal attrition each year in order to bring supply and demand into balance. This should be the peak, he said.

The market has survived oversupply cycles before, and evolved out of them, Turrentine’s Fredricks added. “We’re always in evolution. Even through the good times, it’s an evolution of quality, style and variety that goes on. We have adapted and innovated throughout these cycles, and especially during these oversupply cycles, to attack the marketplace.”

One of the most obvious ways to take advantage of opportunities presented by the oversupply is to work strategically with retail and restaurant partners to establish private label or special edition brands. Fredricks has seen small-volume businesses making these moves, though this solution will take a long time to pan out and affect the overall wine market. In a previous cycle, particularly the bottoming out in the mid-2000s, wineries did much the same, but with varying degrees of success: Fredricks noted that at that time, when wineries had no tank space left at their facilities, they established custom crush partnership agreements to create low-priced, one-off brands for retailers.

Walter Clements, founder and CEO of Meta Wine, developed a supply chain that sources from wine producers around the world, then packages the wine at his Chicago-based facility in an effort to bring quality wine at an affordable price to local wine consumers. Though he does source international wines for his brands, the majority of his offerings are made in the United States. For him, quality and price are top of mind when looking to build partnerships.

“We buy finished wine that is produced with fruit grown locally in the region with which the varietal is indigenously associated. We believe that wine is best when made from the freshest grapes that are picked locally and vinified immediately where the fruit is grown. So quality is our number-one focus,” he said. “Our efficient supply chain ensures value—wine that over-delivers on quality for the price. We look to create an extraordinary rapport between price and quality.”

That said, he’s also looking for something that lasts more than one year of oversupply. “Then, it’s the people. Do we want to work with them for decades? The answer has to be yes. One indicator of a strong prospective partner is a multi-generational winery with a multi-generational team of employees.”

Looking to consumer needs, and meeting them where and how they want to drink, could be another solution. Putting wine into cans has been touted as a popular option but isn’t necessarily the most straightforward.

“If the wine is produced as an afterthought, which is a way of saying if you purchase bulk wine, that wine has been produced; it hasn’t been produced thinking it’s going to be canned. It’s been produced as a regular bulk wine,” said Artesa Winery winemaker Ana Diogo-Draper. “If your intention is to can that wine, you really need to have a technical approach.”

For the wine to be successfully canned, it must be properly treated, Diogo-Draper said. Sulfur dioxide use must be reduced as much as possible because, not only does it lead to reduction, it will create pits in the can’s liner. In addition, if copper levels are too high the liner will further degrade.

International Market Potential?

Unfortunately, there will most likely not be a great deal of interest in our excess wine from international markets. At the World Bulk Wine Exhibition, the focus of discussion revolved not around how to take advantage of low-priced American wine, but rather how to capture the American consumer and increase sales of foreign-made wine.

Though prices for California fruit and wine are at, what we consider, extremely low levels, those prices are still higher than what international buyers and retailers would see from the wines of Chile, Argentina and other grape-producing regions. Though Europe experienced its own abundant harvest in 2018, a shortage in 2019 evened out their market, Fredricks reported, and overall the long-term supply forecast is even with demand.

The problem, at least for this oversupply cycle, is that quality continues to grow worldwide, and without high costs of business (such as land and labor prices, among many others), foreign wines are very appealing. Consumers in the United States, particularly younger legal drinkers, see that value.

Tariffs aren’t necessarily stopping the flow of wine from other countries, either. Spurred on by the 25 percent tariff levied on many European wine producers, Clements looked to the World Bulk Wine Exhibition to work with suppliers to continue to bring their offerings to American drinkers, while protecting margins through his co-packing program.

“The quality very often over-delivers for the price. Many producers that we work with are not selling in the U.S, so have not been shouldering, over time, the marketing expense of operating in the U.S. market, so the wine doesn’t carry an inflated price-tag,” he said. “Fundamentally, we want to expose U.S. wine lovers to new wine discoveries that excite them and lead them to seek new wine experiences. Albariño could be the new Pinot Grigio, and Grignolino and Schiava should be the new red patio pounders this summer.”

However, variables change, Fredricks said. Australia, devastated by wildfires, could look to purchase bulk to bolster programs; China, the greatest buyer of Australian wines, could look elsewhere if it’s needs aren’t met. Civil unrest in Chile could upend that market and producers could look elsewhere for supply.

Proactive Measures are the Only Line of Defense

All this said, sitting around and waiting for the cycle to return to a high isn’t the right strategy. “If you, as a participant in the wine business, aren’t thinking ‘What can I do differently? What actions can I take?’ and are sitting around waiting for others around you to make their moves … then you’re falling behind and you’re going to feel the negative effects of these downward cycles,” Fredricks said. “This market we’re in, of excess and challenge, is also a market of opportunity in terms of new things that can be developed for consumers.”

Until then, Bitter returned to the vineyard for the solution. “We can’t wait to grow into, or for the market to grow into, our supply. We simply, if we want to correct the balance of the market, have to pull vines out. That’s the only answer in terms of a short order fix,” he said. Meaning, proactive measures need to be taken, by either the growers or wineries—pinning hopes on increased demand from the consumer is not a strategy Bitter encourages.

This article originally appeared in the March 2020 issue of Wine Business Monthly.