Wine execs concerned about growth of craft beer, specialty spirits

NAPA - While the California wine market continues to prosper in an era of drought and consolidation, a new survey shows top Golden State vintners remain concerned about the future of the ?$23.1 billion industry, especially among the discerning millennial market.

America’s 70 million millennials are a major focus for top wine executives, according to a UC Davis survey of 26 senior executives, which included Joseph Gallo, chief executive officer of E&J Gallo Winery, Rick Tigner, president of Kendall-Jackson Wine Estates, and Jay Wright, chief operating officer of Constellation Brands.

Millennials, a demographic group from 18 to 34 years of age, do not have the brand loyalty of previous generations and are branching out among a wide array of choices when selecting an adult beverage, such as craft beer, cider and specialty spirits, analysts said.

“Everyone was a little bit worried. It is expected to continue, the intrusion into the wine category of spirits and craft beers,” said Robert Smiley, professor and dean emeritus of the UC Davis Graduate School of Management, who conducted the survey. It was released Tuesday at the annual Wine Industry Financial Symposium in Napa.

“I think craft beer is taking some of the occasion of wine,” noted one anonymous wine executive who responded to the survey. “I think that first bottle of wine is being impacted; you know, people are starting out with craft beers and then as dinner goes they switch over to wine … so it’s just one more competitor to start (a) meal with.” The executive noted that its winery had introduced some lightly carbonated wines to attract younger customers.

“My wife and I have been having more cocktails than we’ve ever had in our past, and it’s fun,” another executive said. “And so, I realize that it is maybe taking a little bit of the wine-by-the-glass business away.”

The sales statistics apparently bear out that notion, especially as a glass of premium wine at a restaurant is typically more expensive than a craft beer or a mixed drink. “No wonder people are going there. You have to recognize that is competition,” said Mike Veseth, a professor emeritus of international political economy at the University of Puget Sound and editor of the Wine Economist Blog.

“The selection is remarkable in spirits and beer,” said Ben Pearson, wine buyer for Bottle Barn in Santa Rosa. “Ten years ago we were about 70 percent wine. Now we are down in the 60s. Spirits have increased significantly. … There is a flood of new products and people experimenting with new things.”

Sales of California wines remain strong, as they increased 7 percent during the first half of 2014, according Gomberg, Fredrikson & Associates. Overall, the total U.S. wine market increased 1.5 percent during the first six months, an increase of 2.5 million cases.

“Yes, we have talked about this U.S. market having grown for the last 20-plus years. That’s really good. But 1.5 percent is fairly anemic,” said John Ciatti, a broker at Ciatti Co., a San Rafael bulk wine and grape broker.

In contrast, craft beer this year grew by 18 percent (21 million cases) and cider jumped 69 percent (3.4 million cases). “That is our new competition and it is a little scary when you think about cider actually growing more than the entire U.S. wine market,” Ciatti said.

Many in the wine industry believe growth of craft beer and spirits will not come at the expense of the U.S. wine sales, but rather strip market share from the traditional mass-produced breweries such as Coors and Budweiser. “I’m thinking craft beer actually expands the market for us and offers an opportunity for millennial exploration and entry into the market, which then will progress up to wine,” one executive said.

Still, the industry is reacting. E&J Gallo last year introduced Barefoot Refresh, a lightly carbonated version of its line, which is the No. 1 global wine brand by sales. It also has expanded its portfolio to include New Amsterdam Gin and Familia Camarena Tequila. Ménage à Trois, which has aggressively marketed to the millennial market, launched a vodka line in June and recently unveiled a prosecco.

“Everybody thought that (competition) was going to happen. They (executives) thought to succeed over the long run is to be on your toes, and you have to think of what these millennials and other consumers want, and continue to enter those new products that appeal to that group,” Smiley said.

The mood in the industry is generally positive, especially at the midpoint of this year’s North Coast grape harvest. Although the crop is smaller than last year’s record-breaking crop, the fruit is of high quality. Other barometers are good. Off-premise sales grew ?by 6 percent from July 2013 to July 2014; and direct-to-consumer shipments increased 10 percent over the same time period. Winery hiring has increased 19 percent for the past year.

David Freed, chairman of the Silverado Group, said he had to “dig a little” to find troubling trends. “It is a pretty good time,” said Freed, who founded the annual symposium more than 20 years ago.

Speakers at the conference, however, noted other issues that they were monitoring. For instance, consolidation in the multibillion-dollar North Coast wine industry is likely to continue as large and mid-sized wineries look to bulk up their holdings. At the top of the list is the likely sale of Treasury Wine Estates; major private-equity groups are currently bidding for its assets.

Locally, Treasury Wine Estates owns Beringer Vineyards as well as other wineries such as Cellar No. 8, Chateau St. Jean and Souverain in Sonoma County, and Stags’ Leap Winery, St. Clement and Sledgehammer in Napa County.

Analysts said vineyard transactions remain a seller’s market as good available local vineyards are becoming scarcer and more expensive, especially in Napa County as vintners face greater zoning regulations. Some exclusive Napa cabernet plots are worth more than $400,000 per acre.

“We’re essentially planted out in Napa County,” said appraiser Tony Correia.

In response, companies such as Jackson Family Wines and E&J Gallo have ventured into the Pacific Northwest looking for cheaper vineyard land with less restrictive permitting processes.

“If your company is large and diversified, you’re looking for something else to take to your sales force and your retailers. You need to be looking at Oregon and Washington. Pinot is hot. That’s why everybody is heading to Oregon,” said Josh Grace, managing director of International Wine Associates.

Prices for Napa cabernet sauvignon continue to increase with its status as the most valuable wine grape in the country. “We’re growing a lot more cabernet sauvignon, and we’re making a lot more money doing it,” Correia said.

Given the profit that cabernet sauvignon grapes attract, Correia said, he has seen a growth of those vineyards in Napa areas that are not particularly suited for the fruit, land located in cooler areas with heavier and moist soil. “We’re planting cabernet that is not going to be truly great cabernet,” he said.

In Sonoma County, Correia said, pinot noir “is clearly driving the bus” for vineyard prices, especially along the coast.

Vineyard buyers fall into three categories: vintners looking to grow their market share, financial firms such as private-equity groups, and wealthier individuals who have fallen in love with winemaking. Wineries, however, tend to be the ones closing the deals, Correia said.

“The wineries are willing to pay higher prices for vineyards if they want the fruit,” he said.

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.