New Rabobank Report Shows Challenges in California Wine Market

Imports increasingly putting pressure on U.S. wines

Sep 28, 2007, 01:00 ET from Rabobank

    NEW YORK, Sept. 28 /PRNewswire/ -- According to a new report by
 Rabobank, the wine market in the United States is steadily growing, but
 California faces challenges from imported wines to keep its market share.
     The report, "The future of the California wine industry: A 'perfect
 storm' of imports brewing?" states that since 1995, imports have grown 184
 percent. However, while California produces 90 percent of U.S. wine, and
 the growing consumption of wine has benefited California more than any
 other state, the current market is not without challenge.
     "Currently, nearly all the major wine-producing countries are
 developing plans to increase sales to he U.S. market, targeting the
 high-value market, where California producers have had more success fending
 off competition in recent years," said Rabobank Food & Agribusiness
 Research Vice President Stephen Rannekleiv.
     Domestic Supply and Demand
     The United States is emerging as one of the most attractive markets in
 the world for high-value table wine due to the size and continued growth of
 the industry. Between 1994 and 2006, consumption rose more than 50 percent,
 with the strongest growth among wines valued at over $9 a bottle and
 particularly at those over $12 a bottle. Below $9 a bottle growth was sloth
 and low value jug wines had negative growth, but still is the largest
 segment of wine sales by volume.
     There are three main trends driving consumption:
     1. Health consciousness: Wine has benefited from growing evidence that
        states moderate wine consumption (1-2 4 oz. glasses per day) can have
        beneficial effects. Between 2000 and 2006 the percentage of the
        population that claims to drink wine at least once per week increased
        70 percent.
     2. 'Trading up': Higher incomes have lead many to seek out affordable,
        everyday luxuries. This is evident in the growth of higher-value wines,
        while lower cost wines have decreased.
     3. Eagerness for new products: Consumers are expanding their horizons and
        experiencing different cultures by trying new products.
     "Supply of U.S. wines has also been strong, but faces a complex set of
 challenges, including surpluses and shortages as pressure on prices, due to
 increased competition from imports, and rising production costs,"
 Rannekleiv said.
     The 2005 California harvest was more than 20 percent above the average
 yield and 34 percent higher than the average yield of previous years.
 However, this appears to be a short-term fluctuation and in the process of
 righting itself as the reserves began to be sold off in 2006. "This
 phenomenon appears to be stifling market signals of shortages of key
 varietals that would normally stimulate an increase in production,"
 Rannekleiv said.
     Instead, some evidence suggests that there is a pending shortage of
 Chardonnay, Zinfandel and Cabernet. The key remains that most of the
 opportunity to increase production will be for higher-quality wines
 particularly in the North Coast - Napa and Sonoma where higher quality
 grapes are grown, but only accounts for 10 percent of the state's total
 production. Grapes from this region are worth 1000 percent more than the
 grapes from the Central Valley, where 70 percent of California's wine
 grapes are grown - mainly for basic wines. Additionally, the Central Coast
 enjoys average grape prices that are approximately 500 percent higher than
 Central Valley prices.
     And while demand for wines from these regions grows, the cost of
 expansion is prohibitive. California faces some of the highest average land
 costs of all the competing wine producers in the world. An acre of land in
 Napa costs an average of more than $150,000 with virtually no land
 available to expand. Additionally, increased border patrols and efforts to
 control illegal immigration make it difficult to find low-cost labor. As a
 result, many must hire labor full-time rather than seasonally to ensure
     Surging Imports
     "The pending shortage of specific varietals combined with California's
 challenges for expanding production of ultra premium wines may be creating
 an opportunity for imports to gain further share of the U.S. market,"
 Rannekleiv said. "European imports made significant process in gaining
 share of the super and ultra premium segments. This trend may be poised to
 continue, as most wine-producing countries are focusing their efforts at
 selling higher priced wines into the U.S. market."
     Over the years, imported wines have been consistently increasing their
 share of the U.S. market. Last year, imports outperformed the overall wine
 market with a 9 percent growth in volume and 10 percent in value. The trend
 of import growth appears to have accelerated in the first quarter of 2007,
 as California wine sales were flat (-1 percent) compared to the first
 quarter of 2006, while imports rose 24 percent.
     The leading sources of imported wines are Italy, France and Australia,
 which account for 77 percent of the value and 71 percent of the volume of
 imports in 2006. Italy is the largest import source in terms of volume,
 while France leads in value. Australia is the second largest importer by
 volume, but lags in value.
     Historically, the market share of imports has been cyclical, and
 imports fill gaps that California wines are able to retake eventually.
 However, over the years, some structural changes in supply and demand have
 altered that cycle. A key change is the consumer as wine consumption from
 the Millennial generation (born 1977-1994) has embraced wine consumption
 more quickly than previous generations.
     While only about half of the generation is of legal drinking age, they
 are increasing their wine consumption more quickly than other generations.
 "Millennials are very internet savvy, regularly read reviews, educate
 themselves about different wines and enjoy experimenting. As these
 Millennials research their wines, they often feel that California wines are
 not the best value - finding equally good from other states or countries at
 lower prices," Rannekleiv said. As a result, Millennials are drinking much
 more imported wine than other generations.
     Additionally, wine supply has changed in recent years. Many of the
 California wine companies have evolved into international companies, and
 are increasingly seeking to offer consumers a broad portfolio of wines at a
 wide range of price points. To achieve this, these companies are
 increasingly sourcing wines from abroad. A result has been the introduction
 of 41 new brands in 2006 alone by the top 10 wine companies - 17 were
     "In short, the large U.S. wine companies are now some of the main
 importers of foreign wines," Rannekleiv said.
     Established growers and wineries on the North Coast are in good shape
 for the current context of the U.S. wine market. "At a time when many U.S.
 consumers are trading up, the North Coast, particularly Napa, symbolizes
 quality and aspiration," Rannekleiv said. However, as demand for
 high-quality wine grows, the North Coast faces a significant land
 constraint, which opens the doors for importers. The key to success in Napa
 and Sonoma is to maintain its premium image, but must be supported by a
 quality product.
     The Central Coast may benefit from the shortage of land in the North
 Coast. While the Central Coast still has only 3 percent of the California
 wine market, its growth rate in 2006 was well above other regions, and even
 better than the growth rate of imports. However, it must continue to build
 its quality image while improving its production efficiency.
     Currently, there is no evidence to suggest that the trends toward
 trading up will slow down, which will keep the market for premium wines
 growing - baring any major economic disruptions. In general, however,
 imports will continue their strong growth and will target the premium
 segment more fiercely forcing California producers improve their
 competitive strengths.
     Rabobank Group is a financial services leader providing retail and
 institutional banking and agricultural finance solutions in key markets
 around the world. From its century-old roots as a finance cooperative
 founded by Dutch farmers, Rabobank has grown into one of the 25 largest
 banks worldwide with approximately US$730 billion in assets and operations
 in over 35 countries. Rabobank is one of the few private banks in the world
 with the highest possible credit rating from both Standard & Poor's (AAA)
 and Moody's Investor Service (Aaa), and is ranked as the world's third
 safest bank by Global Finance magazine. In the Americas, Rabobank is a
 specialist in sophisticated, customer-driven solutions in the Global
 Financial Markets and Corporate Finance arenas and provides banking
 services to corporate food and agribusiness clients; retail and commercial
 banking services in California; leasing; and a full range of agricultural
 finance products to American agricultural producers.

SOURCE Rabobank