Is Your Favorite Californian Wine Really from California? The Growing Bulk Wine Business
July 11th, 2015
by Elliott Morss, Morss Global Finance
In earlier pieces, I have documented how the wine industry is changing. It used to be that vintners grew their own grapes. No longer. Wine makers are increasingly buying “grape juices” and blending them to make their own wines. And moving forward, we can see grape growers joining other farmers at the bottom of the supply chain.
John Casella, the CEO of Yellowtail, is the “poster boy” for this movement. He grows only 5% of the grapes that go into his wines. In one recent year, he bought grapes from 650 different sources. Instead of employing farmers, he has a number of staffers that do nothing but buy grape juice for him. Another example of what is happening: Castle Rock, ranked as the 25th largest wine seller in the US, owns no vineyards (the company does not talk much about this).
So what does this tell us? No need to be a grape farmer to produce good wines. Good wine can also be made by “urban vintners” who know how to find and buy the right grape juice. And this trend suggests a growing trade in grape juices (bulk wine) rather than bottled wine. Live data supports this. Comtrade estimates that 42% of global trade measured by wine exports is bulk shipments (Table 1). The differences are notable. South Africa leads all countries in the portion it exports in bulk followed by Spain and Australia. France exports very little bulk, as do Germany and Portugal.
As one would expect, the average prices for bulk are much less than for bottles, at 93 cents and $4.27, respectively. Interestingly, New Zealand gets a higher average price for its bottles exports than even France. And New Zealand has by far the highest export price for its bulk. At the other extreme is Spain getting only 67 cents for 750mL.
Table 1. – Bottled and Bulk Wine Exports, 2014
The US Case
US grape growers/wine makers, like those of other countries, get some export assistance from the government. The USDA Market Access Program uses funds appropriated by Congress and matched by wineries to encourage the development, maintenance and expansion of commercial agricultural export markets. And as a result US winemakers probably export more wine than they otherwise would. Table 2 gives US wine imports and exports. Note that the US imports more bulk than it exports. In all likelihood, the US wineries are taking advantage of their brand names and good wine reputation by exporting high-priced bottle wine and replacing it with bulk for domestic consumption.
Table 2. – US Wine Imports and Exports, 2014
Not surprisingly, vintners who have taken the time to market their brand names and beautiful vineyards do not spend time talking about their purchases and sales of bulk wines. The French talk of their Bordeaux, Champagnes and Burgundies while the Americans make their beautiful vineyards tourist attractions. And of course, wine distributors and restaurants are on their side: they make more money on higher priced wines. And these promotions work with many customers who view wines as “fashion” statements like perfumes and watches – more expensive means better.
However, recent tastings of the Lenox Wine Club suggest very excellent bulk wines are available at very reasonable prices. In 9 blind tastings against wines costing as much as $85, box wines came in first in six tastings, second in two and third out of five in one. Bota Box was the box wine in most of the tastings. It sells its wines in three liter boxes. Two of its wines come from Argentine grapes with its other 10 from California. Bota Box does not give vineyard appellations. One can presume it buys bulk.
China is an interesting case for the wine industry. It has had pretty good wines for a number of years, but recently, interest in the wine industry has skyrocketed. The International Organisation of Vine and Wine (OIV) ranks it 5th in global wine consumption behind the US, France, Italy and Germany. It currently ranks 8th in wine production but is growing rapidly. The Chinese sense there is money to be made.
Yantai is a city in northeastern Shandong province with a population of about 7 million. It is building the Yantai Changyu International Wine City with construction scheduled to be completed next year. It will include a wine research institute, a wine production center, and a wine trading center. In addition, it will include a demonstration area for grape planting, wine making, automated winemaking equipment and industrial production. The Wine City is also being billed as a tourist attraction.
I recently received an e-mail from a Henry Chen living in Yantai. He wanted me to help him sell his wine. I told him I am not a wine merchant but would be willing to blind taste his wine against others and write up my results. Henry agreed and sent me a bottle of wine for the tasting. The label said “Chateau Paladin, Languedoc Appellation Languedoc Controlee Vin, 2005, Medoc Manor Wine Co., Ltd. Yantai.” He told me the grape varieties were 60% Cabernet Sauvignon, 30% Merlot, and 10% Cabernet Franc. Since this mirrored Bordeaux wines, I bought an inexpensive French Bordeaux along with two Cabernet Sauvignons for the tasting.
Following the tasting, I sent him the following:
Last Saturday night, eight people tasted your wine against three others. The results are presented in the following table. The numbers represent rankings, with 4 the best and 1 the worst.
The three liter Bota Box Cabernet Sauvignon costing the equivalent of $4 per 750ML bottle was the clear winner.
Your wine came in a grouping of three much below the Bota Box. The other two were modestly priced French Bordeaux and an even less expensive Cabernet Sauvignon. I was one of several tasters who noted that the color of your wine was much lighter than the other three, more like a Pinot Noir. It seemed very doubtful to us that your wine was primarily Cabernet Sauvignon.
Given the very mediocre tasting results for your wine, the prospects of launching an effective marketing campaign for it in the US are not good. The US market has become quite sophisticated and a mediocre wine like yours has little chance. The wine shops are overflowing with low priced, good wines and are not looking for more.
Perhaps you would be better served trying to sell it in India or some other country with a growing middle class that has little wine-drinking experience.
There is also another possibility: there are two ways to sell wine – as a “brand” or in “bulk”. It takes a lot of time and money to create a “brand”. However, there is an ever increasing demand for wine sold in bulk. In fact, China imported 82 million liters of bulk wine in 2014 and exported only 91,000 liters of bulk.
You might consider exporting bulk to the US. Many of the larger Californian wineries import considerable bulk to sell to US customers.
In addition, I urge you to read two articles on the future of the global wine industry:
- http://www.morssglobalfinance.com/the-future-of-the-global-wine-industry/, and
I hope this is helpful.”
I have not as yet heard back from Henry.
 For more on Casella and other vintner pioneers, see George M. Taber, A Toast to Bargain Wines: How Innovators, Iconoclasts, and Winemaking Revolutionaries Are Changing the Way the Way the World Drinks, Scribner, 2011.