Wineries see profits flow to bulk sales
Large Central Coast winemakers are benefiting from the global trend of selling wine in bulk rather than bottles.
Over the last two decades, bulk wine — wine that’s not yet packaged for retail sale — has become a major player in the wine-selling game. Bulk wine used to make up 25 percent of the product that wineries sell to wholesalers and retailers; now, it makes up nearly 50 percent, said Stephen Rannekleiv, the executive director of food and agribusiness research at Rabobank.
“When we do global wine research, one issue that keeps coming up is bulk wine,” Rannekleiv said at a Jan. 20 industry conference in Paso Robles. “This has become a commoditized business. Technological advances have make it cost-effective to ship bulk wine.”
While the shift towards bulk wine comes at the expense of bottled wine, the Rabobank study shows that it makes sense for New World producers to sell in bulk. By shipping wine before it’s bottled, winemakers in the New World, a category that includes the United States, Australia, Chile, Argentina and South Africa and excludes Europe, have saved $142 million (about $2.25 per case of wine shipped) annually in transport, duty, packaging and other production costs.
From a practical standpoint, bulk wine also allows consumers to compare wines more efficiently. Because it’s less expensive to ship wine before its bottled, foreign wine is much more widely available than it was two years ago. Consumers can compare Australian cabernet to Chilean cabernet to California cabernet, Rannekleiv said, which may eventually lead to an uptick in quality.
For sizeable Central Coast wineries, the change in the way wine is sold is a good thing. Over the past decade, Rannekleiv said, the U.S. wine industry was threatened by Australian and South American winemakers that were selling bulk wine to consumers all over the world and pulling retail prices down.
“Five years ago, we were worried Australia was going to take over and we’d all be out of jobs,” he said. “Suddenly California suppliers are much more competitive suppliers than we were, because there’s been a clear shift to the bulk wine trade. It’s been a record sales year for California wines.”
One reason U.S. wines are gaining a competitive edge in the bulk wine business is because the exchange rate is favorable. When producers sell wine in bulk, it means its bottled in the country where the wine will be consumed rather than the country the grapes are grown.
Consumers in other countries like to buy bulk wine from the U.S. because the dollar is weak, so they get a relatively good price. And the weak dollar boosts the domestic market by making wine imported from other countries more expensive than U.S. wine.
Vernon Crowder, Rabobank’s agricultural economist, said the exchange rate is benefiting large Central Valley winemakers that can compete on a commoditized level. Wine drinkers inside California and the U.S. are more likely to buy local wine if it’s less expensive than foreign wine of comparable quality.
The Rabobank study shows that the move towards commoditized wine is the result of a challenging retail environment, grape oversupply and new technology. Crowder said Central Valley producers have used technology to grow more grapes without buying additional acreage, thus increasing the value of the vineyards.
To survive in the new wine marketplace, winemakers must cater towards wholesale markets that want to sell less expensive wine to consumers — Rannekleiv said wine drinkers who used to buy $40 bottles are now buying $20 bottles.
Some Central Coast vineyards and suppliers are struggling to keep up with the bulk wine trend. “Suppliers who cannot compete on a commodity product level, due to high currency rates or cost structures, will need to emphasize product innovation and brand differentiation in order to survive,” the Rabobank report says.
Small and high-end wineries in the Central Valley are not faring as well as their larger counterparts. Wineries that produce about 2,000 to 20,000 cases per year have a hard time working with the bulk wine model, according to the study.
Crowder said the challenge for California wineries, especially small ones, is to take advantage of the favorable exchange rate without pricing themselves out of the market.
“They need to balance their prices. They can’t get too high or foreign wines will become competitive,” Crowder said. “Wineries should focus on better yields and better quality so they can differentiate themselves. That’s how to compete with bulk wines.”
In Paso Robles, an important region in the Central Coast wine scene, growers and suppliers are somewhat insulated from the bulk wine trend, Rannekleiv said. Many small wineries in the area sell directly to retailers and, in the case of tasting rooms, directly to consumers.