State of the US wine industry


# **State of the US wine industry** **Over the past year, we have had some exceptional buying opportunities for premium American wine. Let’s take a closer look at what is happening in the American wine industry.** We are looking at a very substantial supply-demand imbalance in the US wine industry that is having a severe adverse impact on especially high-end wineries. This is first and foremost driven by the 2018 harvest being very strong, both in terms of quality and quantity. **[Wine Enthusiast](** gives Napa Cabernet Sauvignon a “Superb” 94 point rating for 2018.  vintage chart And **[Jeb Dunnuck](** gives California North Coast Cabernet Sauvignon an “Extraordinary” 95-97 point rating for 2018. point rating Moreover, the 2018 Napa harvest was not only of high quality, but also yielded 20-30% more volume than average as reported by the **[Napa Valley Vintners Association](**.  Napa valley Vintage Reports After typically16-22 months in oak barrels, the wine market was flooded with high quality red wine in a considerably higher volume than normal. And that is at a point in time when the Covid-19 recession had America in its grip. - Consumers are penny pinching during a recession from having lost their jobs or fearing that they might lose their jobs. They still drink a lot of wine, but USD 100+ Cabernet Sauvignon wines from Napa Valley are being substituted for wines like Argentinan Malbec or Chilean Cabernet Sauvignon bought at Costco, Trader Joe's and Bevmo in the USD 8-20 range. - Restaurant wine sales have tanked as only outdoor seating has been allowed in parts of the United States. Sitting on a terrace, customers are drinking beer, rosé wine, cocktails and hard seltzers rather than expensive Napa Cabernet Sauvignon.  - Winery sales are down substantially. To cut out retail margins, many wineries primarily sell DTC to wine club members, to winery visitors and to restaurants. And with wineries closed for parts of the year, and international as well as domestic tourism down, winery sales have dropped. In addition to these Covid-19 related factors, the high-end US wine industry was already under pressure due to: - An increase in imported wine at more affordable price points. - A retiring baby boomer generation reducing their spending. - Millennials burdened with debt repayments for their student loans as well as high real estate prices in urban areas have not upgraded to purchase USD 100+ bottles of wines in sufficient numbers instead preferring cheaper alcoholic drinks as well as trying out marijuana as a result of increased legalization. The Covid-19 recession was the straw that broke the camel's back and the high-end US wine industry is facing a severely adverse situation. There is a detailed report by **[Silicon Valley Bank ](**for those who want to do a deep dive into the driving forces and how it affects the industry. State of wine industry For those who want to read more, **[Bloomberg](** writes about great deals in the California wine market, **[SF Eater ](**talks about rock bottom wine prices and **[North Bay Business Journal ](**writes about stalling demand. The force of the head wind is simply tremendous. And this is not a purely US phenomenon. The **[French government ](**is having a buying scheme for wine sending it to the distillery to become hand sanitizer and industrial alcohol. When was the last time you drank champagne together with a group of friends? Champagne sales is of course tanking as well due to Covid-19. It is against this background that the high-end private label industry has emerged almost overnight. Private labels have been around a long time for warehouse clubs like Costco selling wine under their **[Kirkland](** house brand as just one example. There were also DTC private label brands like **[CHWines](**. But none of these ever came close to what we are seeing now with several high-end private label brands popping up like **[de Négoce](**, **[Claudine Wines](**, **[Wine Access](**, **[The Wonderland Project](**, **[Cal-Wine Trading](** and **[Becheur](**. And these private label wines have to date not been available in Singapore and in Asia.  **Rise of Premium Private Labels** Next, let's turn our attention to what we are really buying when we pick-up private label wines. In short, the answer is that it varies a great deal. What follows is an attempt at explaining in greater detail what is going on. **First,** wineries have very good sales data on how much they can sell at their regular, premium price points to restaurants, to wine club members, to winery visitors and sometimes to retail. They know their sales run rate and when they have excess juice, they look at ways of offloading that. Some create a second label. **[Alpha Omega ](**is a great example of that having **[Two Squared ](**completely separately from the main brand. **[Joseph Phelps](** is another example having their Innisfree Cabernet Sauvignon also not available on their web site, or in their tasting room, but instead sold exclusively in separate channels. This is one avenue to offload excess wine. Wineries without a second brand essentially face the choice of dumping the juice or selling it to a private label, making the latter more interesting. **Second, **many cult Napa wineries like **[Screaming Eagle](** and **[Harlan Estate](**, only select their very best fruit for inclusion in their ultra premium wines that can command a significant price point in the market. The rest disappears as **[this](** article about **[Screaming Eagle ](**talks about: "Today, it is still primarily the same blocks favoured by Phillips that form the heart of the wines. While the team makes wine from the younger vine blocks every year, so far none has made it into the final blend for either wine. Ultimately, only a quarter to a third of the vineyard makes it into the bottle. The remainder, as they put it, disappears. (The winery won’t say exactly what happens to it.)" The latter a strong clue to how we have been able to offer so many private label wines from ultra-premium wineries. **Third,** in some cases, we are dealing with fruit having been purchased from a vineyard but sent to another winemaker to make wine. This is a little bit like the debate about the influence of nature versus nurture in that both the viticulture (grape growing) and the enology (wine making) have important roles to play. So some of the Napa Cabernet Sauvignon wines picked up by our members have been made by a different winemaker than used by the original vineyard. The fruit is the same (i.e. the viticulture) but the winemaking (i.e. the enology) differs. But this is the rare case as it means a two-year working capital cycle for the private label wine before they can bring the wine to market. And that is something that they really try to avoid. It is far more common to instead acquire original barrels of Cabernet Sauvignon, Merlot, Petit Verdot, etc. from the source wineries and instead hire a consulting winemaker to quickly complete a series of blending and fining trials to sculpt unique wines from the original barrels. That way, wine is “made” in two weeks rather than during two years – a process that is much more efficient from a working capital perspective. **Fourth,** the treatment of the fruit destined for a private label is sometimes different from the treatment of the fruit used by the winery under its own brand. An example of this is "de-stemming", the removal of the stems from the grapes prior to crushing. This is a costly procedure and used for all fruit that ends up in the bottles sold by many premium brand like Harlan Estate as outlined **[here](**. However, if the fruit comes from "trainee vines" considered too young to be bottled under the brand, and therefore destined for bulk sale to a private label, it is not certain that the same expensive "de-stemming" process has been used. In addition, the level of press can be varied. Fruit destined for the winery's own bottles may only receive a "light press" while fruit destined for sale to a private label for cents on the dollar may instead be given a "heavy press" treatment to extract more juice out of the grapes. An apt comparison might be between extra virgin olive oil and regular olive oil from the same producer. **Fifth,** many premium wineries hold back their releases to let the wine mature in the bottles and for the oak to "integrate" as it is called in the wine industry. This is usually not the case for private label wine so another part of why you are getting a great deal is simply that you are purchasing a younger wine and that the winery saves working capital and warehousing costs. It falls on you to mature the wine a little prior to it reaching its optimal drinking window. **Sixth**, many high-end wineries like to develop "terroir specificity" to the degree that their wines can be identified in blind tastings. For this, it is not enough that the wine is good, it must also be distinct and recognizable by sommeliers and wine critics – it must taste like a typical “Wine X” is supposed to taste. And this is another reason to offload barrels of wine that are good but that lack such a distinct signature character. A good illustration of this is what happens at New Zealand's **[Felton Road](**, a premium Pinot Noir producer. Felton Road has a range of high-end Pinot Noir wines: **[Block 3](**, **[Block 5](**, **[Cornish Point ](**and **[Calvert](**. They sample all the barrels produced from each of these vineyards, retain the most terroir specific barrels, and blend the rest into their **[Bannockburn](** "village" Pinot Noir. The wine being rejected is not poor in any way, it just doesn't meet the criteria of high "terroir specificity". So that's another reason why a winery may sell good barrels to a private label – because while they are good, they may not have enough of the signature mark on them. For those who made it to the end, you will hopefully now have a much clearer understanding of the current supply-demand imbalance in the US wine market and the wine that is available in the private label market.