THE PREMISE…OR THE PROBLEM?
Lately, the global wine industry’s wagging tongues are aflutter because the market is down. People (especially younger) are drinking less wine now (less everything alcoholic, actually, but that is another day’s subject), and industry-wide, there is a sense of doom and gloom, head-scratching about what is the cause and how do we fix the problem. Spoiler alert-I am going to make some generalizations.
Many claim the principal culprit is that younger generations (than Boomers) are not interested in wine because they don’t ‘get it’- it is confusing, too complicated, requires education (how terrible?), doesn’t meet their immediate needs, is not refreshing, and incidentally, costs too much.
Today is not the first rodeo for this dismal outlook. Just four years ago, an inciteful article from the NY Times (9 May 2020, Ben Ryder Howe, The Grapelord of Napa Faces a Threat Worse Than Plague) voiced remarkably similar concerns, in only slightly different language:
The wine industry was in trouble, facing its worst outlook in generations — and that was before the coronavirus struck. The litany of plagues was merciless: too many grapes, thanks to an epic haul in California and Washington. Too many wildfires and weird bugs unleashed by climate change. Too many new wineries in Napa, upsetting the balance of agriculture and hospitality. And then there were the millennials, or millenniums,…Mr. Beckstoffer’s anxiety was borne out by the publication of Silicon Valley Bank’s annual report on the U.S. wine industry — probably the most influential analysis of its kind. For years, its author, Rob McMillan, has preached about the alarming convergence of two trends: higher and higher bottle prices at the premium end of the market, and millennial indifference. (my italics)
Many observers argue that younger groups are simply less interested in alcohol these days. Sure, some people want to be ‘sober’ all of the time, which is fine. But more have found that Dope (cannabis), energy drinks, and other drugs take alcohol’s place as the ‘drug’ of choice. Maybe perhaps, younger folks really are concerned about their health, and have bought into the anti-alcohol industry’s doomsday agenda? (Thanks to FB, Google news, Tik-tok, etc, which on line services appear to be the principal access ports for news among younger adults?)
They read the latest ‘news’ from organizations like the WHO, or various research studies indicating that especially with regard to cancer, NO amount of alcohol from any source is healthy. Scare tactics and groups with serious anti-alcohol agendas are on the rise. Seriously, don’t most of us know that too much of almost anything we ingest is likely bad for us in the long run? Sugar, fat, chocolate, meat, dairy, broccoli— if we take the late, former President George H. W. Bush seriously?
Then too, the ever-ready shibboleth that young consumers are all basically ADD, with short attention spans, no focus, needing immediate gratification, and prefer sweeter drinks (cf. the sweeter cocktail craze these days), which most ‘serious’ wine drinkers shun. Gen X-Z simply cannot be bothered to actually ‘learn’ a little about wine in order to appreciate it. Yet according to some pundits, studies etc., younger consumers are more and more concerned about what they put in their bodies, and where it comes from and is it environmentally healthy?
All these reasons beg the real question- why does a person drink alcohol in the first place? If Millennials, Gen X (Y & Z et al) prefer to drink alcoholic seltzers, canned spirits, whisky, tequila or syrupy cocktails instead of wine, what do you imagine is their primary reason for drinking? As my friend and long time wine journalist Dan Berger recently wrote in his Wine Chronicles (Napa Valley Features, Oct 10): “One major reason that analysts give for the huge downturn in sales of wine today is that the alcoholic beverage industry has recently developed so many alternative products that now compete with wine. And to be sure, a segment of the public is happy to drink hard seltzer, mocktails, peach-flavored piña coladas, ciders and banana IPAs… Why is that?
I submit it’s not because they are looking for an inspired taste choice or a good story that a nice bottle of wine provides. Nor do they subscribe to the traditional time for drinking wine, with friends over dinner. Simply put, their reason to drink is to get a buzz, as easily, or quickly, and less expensively and more palatably than wine will provide. Whether because those younger than 45 or so have less patience, need more immediate gratification, or are less curious about the complexities a good glass of wine may provide, wine just doesn’t answer their desires or needs.
Perhaps, the above is just an expression of my natural cynicism regarding all the latest rationalizations about what’s wrong with the wine industry. Here’s one that appears more concrete; ounce for ounce wine has just gotten too expensive on two fronts. Very expensive, high end prestigious wines, Napa Cabernets for example, are simply priced ridiculously high, on the basis of marketing/PR driven strategies, inflated ego and desire for attention from jaded wine media, untethered to the actual costs and reasonable profits.
Apropos this point, in a recent interview with Wine Spectator Publisher Marvin Shanken, Christian Moueix, Dominus proprietor and long-time overseer/director with his brother at famed Chateau Petrus in Pomerol, Bordeaux, Moueix basically admitted that the main problem with Bordeaux wines (predominantly Cabernet or Merlot-based) lagging in the market place is that “We are too expensive—the wines are too expensive. The young people don’t drink red wine any more…the reason is the wines are too expensive”-unquote.
Christian Moueix has been a friend for over thirty five years, and tends not to exaggerate, in my experience. He knows the business. He knows there is a problem. His own top wines as noted above run from $300 (Dominus, the new 2021 is a great wine-2500/bottle 2020 Chat. Petrus). While his comments were strictly related to Bordeaux, they are equally true for California, indeed, many other regions, too.
Christian Moueix (r), JB (l) at Chateau Petrus, April 18, 1991, observing the severe frost damage to the Merlot vines. On the right in background is the winemaker/director of Petrus, Jean-Claude Berrouet talking to Export director Frederic Lospiel (JBMW, 1991)
But there is only so much one producer can do to move the needle downwards, especially given the supply/demand situation, partly driven by nouveau collectors who have effectively commoditized the fine wine market investing in the blue chip wines mainly to turn a profit later re-selling them, and little intention to actually drink their horde.
Furthermore, on another front, as Mr Berger points out ( and we are both of an age to remember back when) inexpensive commercial, California wines (as well from other countries like Australia, the south of France and Chile) now overall, taste, frankly ‘shitty’:
“One of the biggest problems that the wine industry was facing within the last two years was an overwhelming amount of utterly mediocre table wines that were ridiculously overpriced. And I am not talking about high-end cabernets. Those wines have their own separate market and do not affect the greater wine market, which depends on volume to succeed. (Paradoxically the high end market for $100 plus continues fairly strong-JB)
“Many of the so-called premium wines that were priced to sell for $6 to $10 per bottle were terrible. Better wines at that price niche came from Europe, Chile, Australia and even South Africa. You can fool the public for a time, but eventually ennui sets in, and U.S. wine sales began collapsing.”
These are usually more confected and mediocre, often slightly sweet. When made from the high volume of grapes grown in California, the cost of growing grapes is now often more than the amount of money the wine costs at your local supermarket. Better to leave the grapes on the ground.
The vineyard area for these wines is the same, however! These growers are trapped (similarly in the Riverland area of Australia, too). They cannot get a price for their grapes high enough to offset the inelastic price levels their lowly status incurs, so the quality remains low, or gets worse as growers don’t want to spend even more on a losing proposition, especially now when large wineries are not renewing contracts. (More below on this topic.)
Naturally, the huge wineries like Gallo or The Wine Group will continue to demand of their growers lower prices per ton for fruit which ultimately will be subsumed into huge blends of marginal quality, rather than offering a higher, fairer price that allow the grower to keep the vines in the ground and maintain his livelihood.
I cannot prove that these trends better explain the decline in wine consumption (and alcohol in general) over the past few years, which now are forcing producers and growers to rip out tens of thousands of acres of low-cost grapes in California’s Central Valley. As well, many growers even in prestige areas like Napa, Sonoma, and Eastern Washington today find themselves unable to sell the fruit to wineries, even at seriously discounted prices. But I suspect that when people feel they are not getting a fair deal, they stop buying.
WHAT DOES PRICE HAVE TO DO WITH IT?
If we now consider how a bottle of wine is priced to you, the consumer, we gain a clearer picture which reveals two aspects of the wine market that indicate the dysfunctionality of the industry and hinders its ability to reclaim a falling market. One aspect indirectly leads one to conclude that slacking wine sales/consumption figures are the result of an ocean of mediocre wines being sold for too much money even while proclaiming them as ‘great’ value wines (($14-20), where the growers are often paid well below their farming costs for grapes that go into those ‘reasonable’ price value wines.
Simultaneously, the industry’s focus on premiumization continues to push the price of not only limited production wines upwards of $100/bottle, but also that of what a few years ago were high quality but moderately priced wines ($20-30) way beyond the means of most mortal wine-drinkers up into the $50 plus range. It’s true that most of these luxury wines are made in small quantities; perhaps a few hundred cases. But many are not; wines like Opus One for example or Dominus (5000-7000 cases) a year. The cost of grapes for these elite wines (see chart and discussion below) especially from prestige regions like Napa Valley, Bordeaux, Barolo, or Burgundy makes these wines both unaffordable to most, yet in the eyes of many critics and consumers, they are aspirational models for fine wine which other wines should be measured against, and are the wines that interested consumers must enjoy and experience.
When most other wines don’t taste like these luxury wines, or worse, when a consumer who enjoys his confected, boozy cocktail but has little wine experience, is led to buy an inexpensive but recognized branded wine for $15-20 which they taste and meets the wine with a general ‘yuck’, one should not be surprised that wine will not be high on the list of go-to beverages.
I did a little homework for this post, examining recent prices of three-four top varieties in California according to the government’s Wine Grape Crush reports for different years.
[https://www.nass.usda.gov/Statistics_by_State/California/Publications/Specialty_and_Other_Releases/Grapes/Crush/Final/2023/2023_Final_Grape_Crush_Report.pdf]
This highly detailed document each year highlights the weighted average price/ton for grapes in all of California’s Growing districts. One can find the average price/ton for the state in general, and by individual district such as District 4, Napa. Below is a chart that highlights the general trend that has led to today’s current concerns about the future of growing the wine market, at least from a supply side.
I urge you to take a careful look. You should know the following. I worked for several years with some pretty prestigious wine groups in Napa and Washington. I gradually learned about how wineries price their wines. The following is not completely inclusive, but it gives you the idea.
The costs of farming grapes is labor intensive and can be very capital intensive, too, especially when your land has not been inherited and amortized (paid for) over centuries as growers in Burgundy or Barolo are fortunate to experience. An acre of land in an area like Oakville Napa Valley considered for Cabernet Sauvignon can cost $1 million or more today. That land could have an even higher commercial value if you could legally build houses on it. Even really rich, ‘life-style vineyard owners don’t want to lose money on their land. Of course, most of these folks don’t think generationally, so feel compelled to charge $100’s of dollars/bottle for their wines.
Starting around the late 1980’s, perhaps later, a new ’rule of thumb’ formula became normal for determining how much money a wine producer should pay a grower (or value their own property) for his crop , developed by the largest independent grower in Napa Valley, Andy Beckstoffer.
Basically, he argued that if you want to charge $50 a bottle to the consumer, then the grower can be paid 100 times that amount per ton, so $5000. When I got into the business in the 1970’s, things were different. Wine was priced more sensibly on the actual costs of making the wine, without the hype, much lower, if any marketing costs and a reasonable profit. Marketing/PR costs were much less important, producers and growers still often shook hands on an agreed price. Times indeed, were simpler and maybe more sane!
One must include your capital costs financing the vineyard land and depreciation, farming and equipment costs, water costs, energy costs, and the cost of money to cover the amount of time your wine spends aging in new French oak barrels (which to day is $4.50/bottle cost average ) for 15-24 months or more for high quality Cabernet, perhaps 9-12 months for fine Chardonnay. A lot of money gets spent early on!
Then you have to factor in your packaging costs for the bottle, capsule, cork/cap, label, carton etc and storage. Today this runs around $6-14 bottle. You will also need to factor in your administrative costs, including Marketing, PR, tasting room staff etc. Figure 20-25% additional cost based upon your actual costs of production etc. Incidentally, wineries have to pay excise taxes ( not a lot, but still…) on the wine they make, so that figure should be considered in your calculations.
After you add all of this up, now you need to add your PROFIT margin. I checked with a friend who works with one of the better mid-sized wine groups with wineries throughout California. I wanted to know if today’s typical profit margin is consistent with what I remember was ‘usual’ 20-40 years ago and more. He confirmed what I remember as the usual formula to arrive at the FOB price from the winery is still more or less standard practice. Take your final cost figure, all in, and double it (or if limited production, more expensive wine, multiply 250%. If your costs are $25/bottle, then your FOB should be $50-60.
By the time you as the consumer purchases this bottle, after it has gone through our antiquated if generally practical three-tier distribution system, given the size of our country and the individual state alcohol control laws, your bottle cost will be around double that figure. That $50 bottle is now about $100.
And I haven’t even considered inflation yet! But as my back of the napkin figuring sees it, it is no wonder to me that people just don’t consider drinking wine worth the considerable investment, at least for ‘reasonably’ priced wines to enjoy on a regular basis. Here’s one example of the inflation for wine that I remember looking back to 1974. Then, Domaine Tollot-Beaut’s basic home village red burgundy, Chorey-les Beaune 1971/72, sold for the munificent sum of $2.99 at our shop in California. Chorey is not considered a ‘prestige’ village by any stretch of the imagination, let alone marketing! But it was tasty, if simple, clearly Pinot Noir and we sold a boatload of it at the time. The price was fair for most people to enjoy it regularly. (FYI, my salary then was around $3.50/hour) That wine today, the 2022 vintage, costs $50-60 here in the US, and $28-35 in French wine stores! 3000% cost inflation over 50 years seems extreme to me. Supply and demand?
Certainly land prices are way up in Burgundy and obviously in Napa, as are the costs of labor and every thing else. Still, if you look at the chart below, the cost of grapes is a very significant part of the total cost, and really drives how costly your bottle of wine will be.
I circled the figures I most want you to observe. Today’s price/ton and consequent grape cost /bottle for Central Valley Cabernet (Districts 13/14) is not much more than Napa Valley’s (District 4) cost average in 1976. Back then, Napa Cabernets of note (e.g. BV Private Reserve, Robert Mondavi Reserve ranged from $6.50-15; of course there were outliers in limited quantities like Heitz Martha’s Vineyard. What I find interesting is that in 1976, there was reasonable fair price parity between Chardonnay, Cabernet and even Pinot Noir. If one takes today’s formula for pricing and apply it to the cost/ton noted, there is pretty good correlation.
Applying the formula to the 2023 crop in those same Districts, grape costs/bottle are ridiculously low ($0.43 and $0.78). Yet these wines if priced at retail accordingly could only retail for $3.50-6.10. Simply put, many growers are being paid less than what it costs to grow their grapes, and the bottle price is so low that quality will clearly suffer.
At the other extreme, look at how the cost of Cabernet/ton/bottle has escalated even between 2011 and 2023 in in California generally, then Napa and Sonoma. For Sonoma, the average cost/ton of Cabernet went up about 50%. That’s high, but if one assumes around 10% inflation every couple of years or so, not completely crazy.
But Napa! An average price of $9235/ton for Cabernet is nearly double the cost in 2011. That 380tons of Napa Cabernet sold for only $1000/ton suggest it was not especially good press wine. But if you were an astute wine maker, with good blending skills, you could make a pretty decent Napa Cabernet that sells in the low $20’s—more likely you will charge $35-40, because no one in today’s wine market would trust a Napa Cabernet at $25/bottle.
Even if you figure nearly $12/bottle for cost of grapes in 2023, it would be difficult to have a complete cost of more than $40+/bottle, unless you are trying to recoup your land costs in one year, in which case, well, you are a heartless bastard. That said, at the upper extreme of $62,500/ton, which is equivalent to around $80/bottle grape cost, a retail price of $625/bottle is really guilding the lily in my opinion. Paying that much for a ton of cabernet is a priori nutso, and a reflection of the hyperbolic importance producers place on getting high scores from wines that come from acclaimed vineyards and one-upping their neighbors!
But just down the road, probably, there are vineyards producing equally fine fruit ( or nearly so ) that sell for 25-30% of that exorbitant price. Look at the per ton and per bottle prices in the chart for Chardonnay and Pinot Noir. Inexorable price increases over the years across the board, but nothing like that of Cabernet. Similarly, Sonoma Cabernet has seen nothing like the hyper-inflation of Napa Cabernet. At the same, time, for the California regions where most of the tonnage derives for ‘commercial’ affordable wines, the price/ton has hardly advanced over the last 12 years, let alone since 1976, adjusted for inflation.
To conclude, therefore, I suggest that a main reason why people are drinking less wine has to do with consumers, especially but not exclusively younger ones, saying we simply cannot afford good wines of character, AND the cheaper commercial wines being promoted just taste mediocre and we get more bang for our buck from a good cocktail or craft beer.
I used to say that what this country needs is more good $10 wines. Now, I would settle for characterful $20 wines. This doesn’t seem possible anymore given our economics, which is why more people are leaning into imported wines where the cost factors are less (or producers are not operating from the same kind of model as we do in here.
My underlying suspicion is that so long as a greater segment of the drinking population approaches alcohol from the ‘how-does-it affect-me faster point of view, instead of a Gee-why-do-like this-flavor or What-makes-this-so - enjoyable-a taste perspective, then wine will continue to decline. Unless, the wine industry up and down the scale decides to bring down prices, and improve the quality and personality of wines in alignment with what most people can afford.