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108 WINES&VINES November 2015 BUSINESS PRACTICAL WINERY & VINEYARD C alifornia's wine industry will continue to split most of its sales above and below the $10-per-bottle mark, enjoying a rise in overall con- sumption and a growing emphasis on premium wines, according to wine industry leaders who participated in a 2015 survey of CEOs conducted by the University of California, Davis. Results from the survey of wine executives were presented Sept. 22, during the Wine In- dustry Financial Symposium at the Napa Valley Marriot in Napa, Calif. Challenges remain in the form of consolida- tion in the distribution and retail arms of the industry as well as in water and other environ- mental issues, the survey respondents noted. "The good news is that as consumers become more knowledgeable about wine, they are trading up for premium wines and pulling the entire wine market up with them," said Robert Smiley, professor and dean emeritus of the UC Davis Graduate School of Management. "This means that, more than ever, compet- ing wineries need to be investing in their qual- ity lines and in branding," Smiley added. "This could be challenging for some companies be- cause the cost of land and grapes is now higher than ever, partly due to a recent wave of out- side investors who have set their eyes on the wine industry." Survey of wine executives The 13th annual survey of wine executives reflects the opinions and projections of the heads of 24 wine companies. Those firms in- clude 15 California wine producers, two global wine companies and one Washington state producer. Four distributor/wholesalers, one wine broker and one vineyard-investment firm also participated. Most of the executives surveyed noted a definite "premiumization" trend among wine consumers, who are buying more of their wines above the $10-per-bottle price point. "The market is moving upward; it is enormous," said one respondent. "It is growing very fast." Consolidation among distributors and retailers The wine executives expressed concern about the effects of continued consolidation among wine distributors and retailers. Since the federal repeal of Prohibition in 1933, state-by-state regulations have generally required that wine move through three tiers on its way from the cellar to the consumer. Wineries make up the first tier, wholesale im- porters and distributors the second, and res- taurants and retail stores are the third tier. Direct-to-consumer (DtC) wine shipments have presented an alternative, although relatively minor, way for producers and consumers to connect. In recent years, there has been an increas- ing consolidation in the second and third tiers, creating greater competition among wine producers as they jockey for shelf space in retail outlets. With continued consolidation into fewer retail chains, some wine executives reported that it was becoming more difficult to place all of their brands in stores, especially for small producers. "We grew up in an age where we worried that the manufacturers had monopoly power," said one respondent. "Today, monopoly power is at the retailer. Now they are doing private labels that are disenfranchising our national brands." Environmental challenges The wine industry will face continued chal- lenges related to environmental issues, the executives predicted. As winery footprints expand and intensify, the impacts on water resources, air quality, traffic and the surround- ing communities, it will likely be more difficult to produce grapes and wine, many added. "We are going to be scrambling for water and grape supply," said one executive, predict- ing that many Central Valley growers would switch to other crops, further limiting the sup- ply of wine grapes. The five questions submitted to survey participants and their responses follow. Q Are you concerned about the con- tinued consolidation at the distribu- tor and retailer level and the impact it will have on your ability to get your prod- ucts to the end customer? Is direct-to-con- sumer selling (DtC) a viable alternative? " Twenty years ago we had Albertson's, Lucky's, Alpha Beta, Safeway and Von's. They were all separate entities. If you missed an advertisement in Albertson's, you could make it up in an Alpha Beta or a Lucky's. If you miss an ad today with Safe- way or Albertson's you can't make it up with any other business. The answer is yes, we are concerned." " It is less to me about the consolidation as it is the attitude and business approaches that will come with whomever survives the consolidation. It is about their approach to the business. We have approached the business for a long time—we being the collective indus- try—as kind of a brand equity investment to build brands and relationships with con- sumers. There are a couple of reasonably strong players in the consolidation world that really treat the wine category like much more of a commodity than a branded business." " Often in a positive way. If we have a wine with one (distributor/retailer), then we tend to be in all locations. The retail consolida- tion can be very positive, because many of them are very professional in how they op- Premium-Minded Consumers Split Wine Market 2015 survey of wine industry CEOs reveals division between brands at $10 mark By Robert Smiley, Ph.D., and Albert Vontz IV