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SACRAMENTO — California wine shipments dropped in 2009 for the first time in 16 years as major U.S. wine companies looked overseas for the cheap wines that cash-strapped consumers increasingly crave.

Overall wine consumption in the U.S. rose 2.1 percent last year to 323 million cases, a positive trend that bodes well for the industry long-term.

But California wines lost ground as sales fell 1.6 percent to 236 million cases, a drop of 4 million cases, according to widely-watched figures issued Wednesday by Woodside wine industry analyst Jon Fredrikson.

"It was ugly," Fredrikson told wine industry leaders gathered in Sacramento for the annual Unified Wine & Grape Symposium, the nation's largest wine industry trade show. "Many people I have talked to said it was the worst year in their history."

For small- to medium-sized wineries, the year was "brutal," as consumers shunned higher-priced wines, powerful distributors focused on big brands, and the global recession hurt exports, said Fredrikson, president of Gomberg, Fredrikson & Associates.

The nation's largest wineries, however, were able to capitalize on the "trading down" phenomenon by tapping into the increasingly globalized supply of cheap wine.

Massive wineries like E&J Gallo, Constellation Brands and The Wine Group, and to a lesser degree "nimble" negociant wineries like Don Sebastiani & Sons, were able to import bulk wines like pinot noir from France and malbec from Argentina. They then bottled it in the U.S. and quickly pushed it out into the market.

This trend of U.S. wineries "outsourcing" wine has been growing gradually for several years, but it exploded in 2009. Even Fredrikson, the industry's leading analyst, said he was "blindsided" by the surge.

The amount of imported bulk wine increased to 25 million cases, an 87 percent jump over the prior year. This helped push imports' share of the market to an all-time high of 104 million cases, or 32 percent of the market.

The surge in imports should serve as a wake-up call to California wineries that have long considered themselves immune to competition from lower-quality imported bulk wine, said Glenn Proctor, a broker with Ciatti Co., a San Rafael-based grape and wine broker.

There's a "shifting paradigm" underway in the industry, he said. U.S. wineries and grape growers used to only worry about other U.S. competitors, but those days are long gone.

"Today that's not enough. If that's all you know, you're not able to compete in the market we live in today," Proctor said. "It is not a time to be complacent."

Traditional wine-drinking nations, such as France, Italy and Spain, are all facing dropping domestic consumption, making those nations look for new markets for their wines. Meanwhile, the New World wine industries in Argentina, Chile, Australia and New Zealand have far lower production costs than the United States, thanks to the use of technological advances like mechanized harvesting and pruning, he said.

All these nations are targeting the U.S. market, which is the largest wine market in the world, and all present significant challenges for domestic producers, who need to adapt to the challenge, Proctor said.

Even producers of the highest-end wines, like Napa cabernet sauvignon, need to face the challenges from lower-priced imported wines instead of relying on old assumptions that bulk wines can't compete, Proctor said.

The improving quality of these bulk wines is changing consumers' ideas about how much they need to pay to get a good bottle of wine, he said.

"We can't take it for granted anymore that we live in this isolated world and we can't be harmed because that's not the reality," Proctor said. "If you live in a box, you're going to die in a box. You have to think outside of the box."

Despite the doom and gloom, Fredrikson said there were tentative signs of improvement.

Higher-end wine sales improved slightly toward the end of 2009, perhaps a sign that consumers are feeling better as talk of a recovery increases, he said.

"I think it's beginning to loosen up a little bit," he said.

But small- to medium-sized wineries will probably continue to face distribution challenges even if the market improves because of the severe consolidation of distributors. In 1995, there were 1,800 wineries and 3,000 distributors across the United States. In 2009, there were 6,200 wineries and 675 distributors.

Wineries, such as Constellation, have reduced the number of distributors they work with. When times got tough, it revealed just how cozy those relationships have become, Fredrikson said.

"The big guys pounded the table and said &‘Sell my products' and so everybody else really got shut out and that made it very difficult to sell wine," he said.

Ed Sbragia, owner of Sbragia Family Vineyards in Sonoma's Dry Creek Valley, said sales of his wines, which are priced from $20 to $75, are up slightly, but not to the level he'd planned when he moved into the former Lake Sonoma Winery in 2006.

He's traveling more, taking no salary, and talking to his bankers regularly.

"We're surviving, just keeping our heads down and surviving," Sbragia said.