Will Premiumization Ever End?

Brands priced in the $10 to $20 per bottle range have grown like gangbusters in the last few years. Take a look at Meiomi, which was sold to Constellation Brands for an incredible $315 million. Two years’ worth of Nielsen off-premise data reports will also say as much. Interviews with the CEOs and presidents of the WBM Top 30 wine companies in the United States all see premiumization happening—and are hedging their bets to take advantage of it. Vineyard land prices are growing much in tandem, and grapes destined for premium wines are selling at record-high prices on the bulk market.

The question is will it stop? And when?

The answer is not an easy one. Economists and brokers will tell you that everything runs in cycles, and that we are destined for another downturn. If the Great Recession of 2008 taught us anything, it’s that consumers don’t stop drinking alcohol when times are tough (if anything they could probably use the stiff drink more); they just spend less per bottle. That goes for all categories, including wine, beer and spirits. So, in theory, when the economy takes a turn for the worse, drinkers will likely start trading back down again.

But here is where it becomes a bit more tricky. Land prices are almost recession-proof. When the economy tanks, prices for plantable land level out. When the economy picks back up, prices for those same acres start to rise again, and the cycle continues in tandem, according to a recent presentation appraiser and owner of The Correia Company, Tony Correia gave at the Vineyard Economics Symposium on May 25.

“The growth of vineyard values in Napa has been fairly dramatic. This has gone fairly strongly for quite a long time if we go back to the ‘80s or ‘70s. Every once in a while when we have hiccups in the economy they’ll plateau down. Sometimes they’ll soften a little bit but pretty much they hold their own and then they go and increase again,” he said.

So premiumization is not only occurring on store shelves; it’s happening at nearly every winemaking step, from earth to mouth. Will that change?

The Current Situation

There are three main ways we can look at premiumization: consumer purchasing habits, the price of vineyard land and the price of grapes/bulk wine. What’s happening on the retail and direct-to-consumer sides have certainly seen a lot more attention, as much of what happens in the vineyard and winery is dictated by trends in consumer consumption. There is near-universal support from wineries and retailers to push higher price points, and consumers are continuing to open their wallets just a bit more to accommodate that price. Nielsen scan data, which tracks off-premise sales data, shows that wines priced at $9 and above have seen consistent, double-digit growth in value and volume, specifically 10.8 percent and 10.2 percent, respectively, on average in the 52 weeks ending April 23.

It’s near impossible to predict when or if consumers will start trading down again. Until then, perhaps the biggest concern for winemakers and growers alike is where all the premium grapes will come from.

Vineyard Pricing on the Up

So what drove the increases in vineyard land prices? Simple. Supply and economics. Total acreage in California declined last year. In Sonoma County, 399 acres were pulled out in 2015, dropping the total down to 59,575 acres. It was much the same in Napa, where acreage dropped by 378 acres to 45,537. In Mendocino, total acreage only dropped by about 30. The National Agricultural Statistics Service reported total state acreage dropped from 615,000 in
2014 and to 608,000 in 2015.

At the same time, a report from the California Chapter of the American Society of Farm Managers and Rural Appraisers states that the price of a prime acre of Napa Valley vineyard land rose 14.8 percent in 2015. For an acre on some of the best land in a valley, a buyer could expect to spend $310,000 per acre, compared with $270,000 per acre in 2014.

“The winegrape vineyard market continues to operate in a universe of its own,” wrote Janie Gatzman, ARA, co-chairwoman in the report. “The reigning darlings of the industry—nut crops and premium wine grapes— posted record prices.”

The Central Valley isn’t immune to this rise, either (see below)

With a shortage of available, plantable land, it should come as no surprise that prices rose, especially in “prime” regions (those that produce premium grapes which fetch the highest bottle prices). There are two forces pushing the overall rise: the buyers and what Correia calls “appellation creep.”

BUYERS
Wineries are increasingly taking measures to ensure their grape supply going forward, either with long-term contracts or by purchasing vineyards outright. In the last two months, Jackson Family Wines purchased Copain Wines in Sonoma County and Penner-Ash Wine Cellars in Oregon, Delicato Family Vineyards made a 242-acre purchase in the Santa Lucia Highlands and Ste. Michelle Wine Estates grabbed Sonoma’s Patz & Hall Winery.

“The big wine companies seem to go through different cultural ideas about whether or not they want to own vineyards or not. Some financial people say, ‘Well, vineyards are lazy assets. We don’t want to own those, we just want to acquire the grapes.’ Now the opposite is true because we see wineries wanting to own and control their land and their vineyards,” said Correia.

APPELLATION CREEP
“Folks that used to say, ‘We’re strictly a Napa brand and we only want grapes from Napa,’ now say ‘Maybe we’ll drive out to Lake County or maybe take a run out to Mendocino County,’” said Correia.

The lines between prime and secondary market areas have been blurred. Premium, or prime, areas are expanding to include what once used to be considered secondary or marginal land. “It’s essentially anything that can ripen Cabernet,” said Correia.

Hal Forcey, senior appraiser for American AgAppraisal, agreed. “The AVAs are a driver and I’m not taking that away. I’m not saying that Oakville and Rutherford aren’t incredibly important but they’re not really the sole dividing lines. It means the market is saying, ‘Look, I can grow some darned good Cabernet here in Calistoga or Oak Knoll and we’re willing to pay for it.’ That’s because the wineries need it and the growers that have been willing to take a little bit of risk and go out on a limb with the money are starting to say, ‘Wow, we can do this.’”

Going forward, supply and demand will continue to be a critical driver, and any vineyard or land that can produce premium grapes will see its value increase. Wineries and a few key growers will continue to scoop up land in an effort to guarantee a constant supply of quality grapes.

“That’s going to have a big impact on anybody wanting to get in the market in the future because they’re going to have to sit down with a few of our key guys to say, ‘I want you to help me grow my business,’” said Forcey. “I think that’s a real important factor. The land use controls are limiting expansion and the deals for modern bidders are only going to take us so far and then we’re going to be bumping against supply and demand because the regulations.”

Bulk Grapes and Wine See Upward Slope

“Dare we say, people have learned from past cycles and are preparing for the downturn,” Turrentine Brokerage bulk wine broker Marc Cuneo told a group of growers and financial experts at the Vineyard Economics Symposium on May 25. In his annual address on the state of the current grape and bulk wine market, Cuneo said that signs are looking positive, at least on his end. Prices for grapes are steadily increasing across the board, though available tonnage did decline with the shorter 2015 harvest.

“As we say, the markets are balanced for about five minutes and we’re kind of in that position right now and there’s demand across the board. We’re just trying to figure out what will bring those prices down,” said Cuneo.

There are a few major factors creating a temporarily balanced market, he and North Coast broker Mike Needham said. First, the majority of grapes are under contract and there aren’t many new acres coming in—North Coast acreage is actually decreasing.

This will continue to push supply, as demand for a limited number of grapes, which are already contracted out, is tested. As a result, expect to see a higher price per ton, especially for the grapes destined for bottles priced over $10.

“There is a diminishing supply of grapes available in the open market, especially in Napa. Every time a big winery buys another vineyard or leases another vineyard, they tie up another chunk of the grape market and there’s fewer grapes available on the open market,” said Correia.

“There is a perception, I believe, of a premium grape shortage as we go forward. Contracts are indexed to the district average so they continue to go up. As long as grape prices go up, the
index goes up and they just keep going on forever.”

Where Do You Find the Grapes?

Given the current high-priced and limited-supply environment for land and grapes, wineries are going to take a long, hard look at how they use the grapes they have.

“You can’t create more grapes, that’s a time consuming process,” said Scott Warren, director of grower relations for Constellation Brands. “It is possible to plant more grapes in the Central Coast, possibly in the North Coast, but it’s very limited in Napa and Sonoma. Long-term you could grow supply to a certain extent, but as far as today, and tomorrow and the next year or two or three, you’re going to see more of a push of premium grapes into truly premium
products. There will not be a lot of wines that are lower pried on the shelf with Napa and Sonoma grapes in them.”

In John Azevedo’s mind, Oregon and Washington will step in to fill the void for less-premium wines. As director of grower relations for Jackson Family Wines, he sees the amount of available land in the state as a solution to the premiumization problem.

“They’re not really growing almonds or nuts in Washington. They’re growing grapes. There’s a reason for that,” he said. “The story of the $10 bottle of wine might not be Paso Robles. It will be Yakima Valley.”

Is the Cycle Broken?

“After 2000, things have changed. The world’s a little different place in the 21st Century. The question still is, “Is the cycle broken?” The answer to the question is the four most dangerous words in the English language: ‘This time it’s different,’” Correia said. 

This article first appeared in Wine Business Insider, volume 26, number 9.