Great Deals in California Wine Are Coming

(Bloomberg) -- Good news is in rare supply these days, so wine lovers, drink this in: The quality California juice that’s been going into $25-plus name brand wines will start turning up in bottles that cost half the price for the next several years.

That’s the conclusion of several wine reports released in the past six weeks. Rob McMillan, founder of the wine division of Silicon Valley Bank, predicted in his annual State of the Wine Industry Report that wine lovers are about to enjoy the best retail values in 20 years.

The flip side of consumer benefit is gloom and doom for California’s wineries, a trend McMillan noted in last year’s report, too. It’s the age-old story of oversupply and under demand: too many grapes along with the fall in U.S. wine consumption for the first time in 25 years in 2019. (Even when Lehmann Brothers collapsed, people were buying wine to drown their financial sorrows.)

The state’s current glut is having an impact on every region and price point, says McMillan. The problem began with a planting boom in 2016, when California growers put in thousands of new acres of vines, mostly cabernet, pinot, and chardonnay, anticipating demand that didn’t show up. It takes several years to get from planting to bottle. But then came a record-size crop in 2018 just as wine sales growth was flattening. Tanks were full of unsold wine even as the 2019 harvest began. Although growers delivered a smaller but “near perfect” crop, it wasn’t low enough to suck up oversupply.

At the Unified Wine and Grape Symposium last month, Jeff Bitter, the president of Allied Grape Growers, said growers up and down the state left grapes unpicked last fall because they simply had no buyers. Many wineries cancelled contracts. There was no point in wasting money on seasonal workers. In the Central Valley, mechanical pickers simply dumped grapes on the ground for fertilizer.

With demand so low, grape prices plummeted 20% to 40% in 2019, according to McMillan, which will also bring down prices of bottled wine.

At the end of 2018, for example, Napa Valley cabernet sauvignon bulk wine was selling for $25 to $40 a gallon, but in February 2020, wine from the 2019 harvest was selling for $18 to $25 a gallon, according to bulk wine and grape broker Turrentine Brokerage. Russian River Valley and Sonoma Coast pinot noir grapes selling for $12 to $14 in 2018 now go for just over half of that. Ditto chardonnay.

Sonoma winemaker Jamie Kutch, who buys grapes for his stellar Kutch pinots, says, “Last fall an absolute ocean of fruit was available. I could have bought as much as I wanted.” He snapped up less expensive grapes and dropped a contract where a grower who’d raised his prices 25% over the past few years wouldn’t negotiate.

Cabernet, pinot, and zinfandel account for a lot of what went unpicked, according to global wine and grape broker Ciatti. The cabernet inventory in January 2020 was 9 million gallons, almost 2 million more than at the same time last year.

Hard as it is to imagine, growers will rip out vines this year, says Allied Grape Growers’ Bitter. For long-term sustainable supply-demand balance, he estimates, California has an oversupply of at least 30,000 acres of vines, about 5% of the state’s total acreage. In Central Coast spots such as Paso Robles, growers are already planting pistachios.

Why wine demand is dropping

Blame—or thank—millennials for sluggish demand, say McMillan and others, who point out that those in the demographic group don’t drink as much wine as previous generations did when they were at the same age. For years the wine industry assumed millennials would follow the boomer pattern: try wine, learn more about it, then gradually buy more and more expensive wines. That hasn’t happened.

Ongoing student debt is one reason they’re not graduating to $100 bottles. Another is their embrace of health and wellness, which has led to higher sales of lower-carb and lower-calorie beverages such as hard seltzer.  (Nielsen data show hard seltzer sales reached $1.4 billion in the 52 weeks to November 2019.) According to Wine Opinions newsletter, sales of low alcohol and no-alcohol products are expected to grow 32% by 2022.

And, hey, millennials have broad, experimental palates as well: Wine competes with spirits, cocktails, craft beer, and cannabis. Even France is seeing a decline in wine drinking as spending on beer rises.

But it’s not just millennials. As boomers age, they’re drinking less wine, too, and, well, they won’t live forever.

Still, the biggest reason for the the drop in wine sales, says McMillan, is that the industry isn’t giving fussy consumers everything they want in varietals, bottle sizes, experiences, and much more.  For example, younger consumers are embracing half bottles (375ml). That category is selling well, but most wineries primarily make 750ml bottles. They also like healthy products, boosting demand for wines made with organically grown grapes.

“We should be marketing better,” adds McMillan. “A lot of young consumers think industrial hard seltzer is healthier than wine.”

Where you’ll see the bargains

Right now, wine inventories are high, but reduced sales expectations are also high. (While you might think the 25% tariffs levied on French, German, Spanish, and U.K. wines would help boost California sales, that really hasn’t been the case so far—though California rosés might benefit next summer.)

How much and when this will affect prices for top Napa cabernets isn’t clear yet. “The demand for grapes from our heritage vineyards in Napa is still very strong,” mega-grower Andy Beckstoffer, who provides very pricey grapes to cult wineries such as Tor, Schrader Cellars, Realm, and Memento Mori, said in an email. “I suspect that grape prices for Lake and Mendocino counties will stabilize and go a bit lower. Napa cabernet sauvignon should stay at about its prior levels. The big problem is perhaps with bulk wine.”

In other words, the price for your favorite, collectible Napa cab may not drop right now, but it probably won’t go up, either.

Instead, lower-end wines will be better quality for the price. During the last big grape glut, in 2000 and 2001, Fred Franzia bought 400,000 gallons of Napa cabernet at deep discount and started the Charles Shaw brand phenomenon Two Buck Chuck, its nickname reflecting the price at Trader Joe’s. Although the price crept up to almost $3, this year it’s back to $2.  

McMillan predicts that the glut will encourage more private-label wines from places like Aldi’s and Costco as well as retailers including Total Wine. The key to finding them will be more specific geographic indications on the label—Russian River Valley pinot, for example, instead of generic Sonoma pinot.

He expects some high-profile top wineries to spin off extra wine into second or third labels they can sell at a lower price. But they won’t be making those decisions until later this spring or summer. And some will surely find their quiet way into direct-to-consumer sales, wine clubs, and online discount sites such as Last Bottle.

Go for it.

To contact the editor responsible for this story: Justin Ocean at jocean1@bloomberg.net

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