Special Issue: Issues In The California Wine And Wine .

Table 2. U.S. Wine Revenues by Price Categories, 1995-2006RetailPrice1995Wine CategoryUltra-Premium Over 141998 1999 2000 2001 2002 2003Implied Revenue ( millions)648 1,188 2,1823,110200420053,197 3,413 3,694 4,061 4,428Super-Premium 7 to 141,273 2,696 3,087 3,087 3,326 3,604 3,780 4,108 4,738Pop.-Premium 3 to 72,070 2,886 2,9703,156 3,078 3,168 3,150 3,180 3,270Jug WineBelow 31,666 1,627 1,5771,320 1,262 1,262 1,351 1,334 1,260Total5,656 8,398 9,815 10,673 10,864 11,447 11,975 12,683 13,696Wine CategoryRevenue Shares (Nominal)Ultra-Premium Over 1411%14%22%29%29%30%31%32%32%Super-Premium 7 to 1422%32%31%29%31%31%32%32%35%Pop.-Premium 3 to 737%34%30%30%28%28%26%25%24%Jug WineBelow 329%19%16%12%12%11%11%11%9%Total100% 100% 100%100% 100% 100% 100% 100% 100%Source: Selected Gomberg Fredrickson Reports and authors’ calculations.24 percent), so some of the increasesin wine revenues were due to infla tion. In order to assess the changesin volume reported in Figure 2, wecorrected for inflation by calculat ing the Paasche and Laspeyres priceindices since 1995, finding that wineprices declined 7.5 percent (Paasche)to 6.3 percent (Laspeyres), meaningthat inflation-adjusted wine pricesdecreased. This decline may be onereason that consumers upgraded thequality of the wine they bought.Health considerations may also havecontributed to increased wine sales.The well-known “French Paradox,”first popularized by the television pro gram 60 Minutes in 1991, posits that themoderate consumption of red wine bythe French tends to offset the negativeeffects of their high-fat diet, leading toa lower heart disease rate than in theUnited States. This positive effect ofwine on health may have encouragedAmerican consumers to buy more wine.New World, Old World:Taste, Production, and TradeThe quality of California wines wasrecognized during the Paris surpriseof May 24, 1976. On that day, Frenchexperts in a blind tasting in Parisranked Stag’s Leap Cabernet Sauvignonand Chateau Montelena Chardonnay4the best red and white wines, encour aging Americans interested in food andwine to drink more California wines.Many Americans seem to prefer theNew World style of wine making, fromCalifornia, Chile, Australia, to OldWorld European wines. New Worldwine producers aim for a consistenttaste across vintages of a wine madefrom one variety of grapes. This tasteis often described as fresh and fruity,with an alcohol level of 13-14 percent,rather than the 11-12 percent commonin European countries that receiveless sun. New World wineries thatblend several varieties of grapes usu ally include the percentage of each.Old World European producers inFrance, Italy, and Spain have a differ ent winemaking style. Winemakersemphasize “terroir,” meaning that thewine reflects the soil and weather wherethe grapes were grown, so that differentvintages can have very different tastes.Many Old World wines need to be cel lared to attain their full potential, whichmeans they should not be drunk rightaway, even though the vast majorityof wine drunk in the United States isconsumed soon after purchase. MostOld World wines are blends of severalvarieties of grapes, and are often soldwith a geographic indicator (e.g., Bur gundy). American consumers are oftenGiannini Foundation of Agricultural Economics University of Californiaunfamiliar with these names, sothey typically select a New World2006 varietal wine rather than an OldWorld “mystery in a bottle.”Differences in wine styles are in4,7525,292 part due to differences in produc 3,396 tion techniques and the role of the1,205 government in the wine industry.14,645 New World wineries are often ver tically integrated, growing some oftheir own grapes or controlling and32% influencing grape growing practices36% with formal or informal contracts23% (See ARE Update Vol. 3 No. 3 for8% the results of a study regarding100% contract use in the California winegrape industry). In the Old World,there are many small grape grow ers, and in many areas cooperativescrush locally grown grapes. Under thetraditional geographic indicator sys tems, long lists of rules govern howgrapes are grown and wine is made.Greater flexibility in the choice of pro duction techniques, including irriga tion, means that yields are much higherin the New World than the Old World.The European Union has takensteps to improve the competitive posi tion of its members’ wine industries,largely by subsidizing the removalof wine grape acreage that produceslow-quality wines, much of which isdistilled into industrial alcohol. TheEuropean Commission has proposeda loosening of rules regarding grapegrowing and winemaking, and allow ing for the simplification of wine labels.Some European growers and winemak ers have opted out of the traditionalsystem and begun to produce varietalwines using New World techniques.Trade plays a very important rolein the world wine industry. Of the300 million cases of wine sold in theUnited States in 2006, about a quar ter were imported. Of the 270 millioncases of U.S. wine shipped from U.S.wineries in 2006, about 45 millioncases (17 percent) were exported.

The leading source of wine importedto the United States has shifted fromthe Old to the New World—imports in2006 were as likely to be from Australiaas Italy. Imported wines are particularlyimportant at lower price points: 40percent of wine sold for less than 10per bottle retail is imported, reflectingthe popularity of brands such as YellowTail from Australia. Bulk imports arealso important, although invisible tothe final consumer. The United Statesallows wineries to blend up to 25 per cent foreign wine with local wine andlabel it as local, e.g., California wine.Developments in other countriesmay affect the competitive position ofCalifornia’s wine industry. Australiaand Chile produce disproportionateshares of the world’s wine relative totheir populations, encouraging exports.China is a great unknown. The acre age of winegrapes is increasing, andmore local production may increaseinterest in wine drinking, opening thedoor for imports. However, if localproduction leads to wine that can besold abroad, China could become amajor exporter. The two possibilitiesare not mutually exclusive, of course,and the net impact is uncertain.Structure of the CaliforniaWine Industry: A SpecialCase in U.S. Agriculture?The California wine grape industry isdifferent from much of U.S. agricul ture, reflecting the heterogeneity ofwine and the wide range of distributionchannels. There is a wide variation infarm gate prices, in the price of wine,and in the farmer’s share of the retailwine prices. Equally important is thewide variation in the grower’s shareof the retail price of wine—integratedgrower-winery operations that sellmuch of their wine to tasting custom ers receive far more of the average retailprice than those growers who sell towineries who sell to distributors andthen to retailers. Unlike products suchFigure 4. U.S. Wine Shipments for Top Ten Firms and All Others (millions of cases): 200640.3E.&J. Gallo4.2625.0Constellation BrandsThe Wine Group5.56.0Bronco Wine Company10Trinchero Family EstatesFoster’s Wine EstatesBrown-Forman WinesDiageo Chateau and Wine Estates16Jackson Family Wines5722Ste. Michelle Wine EstatesAll OthersSource: Penn 200742as corn or wheat, wines vary by grapevariety, location, and other factors.The U.S. food system is markedby fewer and larger farms producingfood and fiber, and a similar consoli dation in firms that pack and processfarm commodities. The total numberof U.S. farms, defined as places thatnormally sell farm commodities of 1,000 or more, has remained steady,but the largest five percent accountfor an increasing share of the value oftotal production—almost two-thirds.The California wine and winegrape industry is different. Thenumber of wine grape growers hasincreased slightly to almost 5,000 inthe past decade, consistent with thestable number of U.S. farms, whilethe number of wineries doubled to2,900, the opposite of the general con solidation trend in food processing.However, within the winery sector,there is significant consolidation.The largest California wineries havelong accounted for most wine ship ments. Consolidation is often measuredby the share of total sales accountedfor by the largest firms in the industry.The two largest California winerieshave accounted for about 45 percentof wine shipments over the past 15years, the four largest 60 to 65 percent,and the eight largest 75 percent. Totalwine shipments have increased almost60 percent since 1990, meaning thatthe largest wineries are shipping morewine despite a stable market share.California accounts for about 90percent of U.S. wine production, andthe U.S. industry is slightly more con centrated than the California industry.Figure 4 shows that the top three win eries accounted for nearly 60 percentof total wine shipments, and the topten 85 percent of total shipments.An important part of the large firms’recipe for success is their ability tooffer distributors and large retailers arange of labels at different price points,including U.S.-produced wine andimports. E&J Gallo, the largest wineryby sales volume, offers brands rangingfrom jug wines such as Peter Vella, tofighting varietals such as Turning Leaf,to premium offerings under the GalloFamily Estate label. Gallo also owns theFrench label Red Bicyclette and distrib utes the Australian label Black Swan.Many wineries have grown throughacquisitions, several of which aremotivated by the quest for more labelsor brands. Many wineries also intro duce new labels—the number of winelabels is increasing much faster thantotal wine sales. Over 500 new winelabels were introduced in U.S. super markets in 2005, up from 300 the yearGiannini Foundation of Agricultural Economics University of California5

Rachael Goodhue is an associate professor,Richard Green is a professor, Dale Heien isan emeritus professor, and Philip Martin is aprofessor, all in the Department of Agriculturaland Resource Economics at UC Davis. They can becontacted by e-mail at goodhue@primal.ucdavis.edu, green@primal.ucdavis.edu, dmheien@ucdavis.edu, and martin@primal.ucdavis.edu,respectively.For Additional Information,the Authors Recommend:Grapes, including winegrapes, tablegrapes and raisins, were California’s second-largestagricultural crop in terms of revenue in 2006, generating 10 percent of the state’s 31.4 billion in farm sales.before, bringing the number of activewine brands in supermarkets to 3,000.As a result, the average number ofcases sold per label has been declin ing toward an average 20,000 a year.(www.winebusiness.com/SalesMarket ing/webarticle.cfm?dataId 42402.)Smaller California wineries, andsimilar wineries throughout the UnitedStates, often aim to sell three-quartersor more of their wine directly to con sumers, many of whom visit the wineryto taste the wine. Small wineries areoften defined as those that sell lessthan 10,000 cases a year, and directsales eliminate distributor and retailermarkups as well as winery-incurredshipping costs. Many wineries haveloyalty clubs that ship wine directlyto consumers and invite club mem bers to special winery events and offerthem discounts on additional winepurchases. One parallel is commu nity-supported agriculture, wherebyconsumers receive a share of a farm’sproduction on a regular basis for a fee.Mid-size wineries face challenges.Just as grower-packers who are toolarge to depend on direct-to-consumersales, but too small to attract the atten tion of major distributors or retail ers, wineries in the middle betweendirect sales and multiple labels and6marketing clout may have to seek anew business model. Mid-size winer ies could shrink and follow the smallproducer strategy, grow and followa large-producer strategy, or becomepart of a large producer’s brand port folio via mergers and acquisitions.The Future of California WineIn many ways, wine is a Californiasuccess story. The state’s wine hasgained consumer recognition for itsquality and introduced new productionand marketing techniques that havecontributed to its success and havespread to other New World produc ers. Larger wineries are developing aportfolio of brands through growthand acquisitions, while smaller win eries are fine-tuning strategies thatinvolve direct sales to consumers.Mid-size wineries may be squeezedin this emerging wine marketplace.The California wine industry cannotbe complacent. It faces challenges thatinclude more competition from otherimports and other American wine pro ducers, but the growing reputationfor quality, the increasing willingnessof consumers to pay for higher qual ity, and the wine industry’s ability toinnovate bode well for its success.Giannini Foundation of Agricultural Economics University of CaliforniaCDFA. 2007. Final Grape CrushReport. 2006. www.nass.usda.gov/Statistics by State/California/Publications/Grape Crush/indexgcb.asp.Goodhue, Rachael, Dale Heien,Hyunok Lee. 2000. Contract Usagein the California Wine GrapeEconomy. ARE Update 3(3):7-9.Goodhue, Rachael, Richard Green,Dale Heien, and Philip Martin.2008. California Wine IndustryEvolving to Compete in 21st Century.California Agriculture 62(1):12-18.Sumner, Daniel A, Helene Bombrun,Julian M. Alston, and Dale Heien.2001. An Economic Surveyof the Wine and Wine GrapeIndustry in the United Statesand Canada. e Institute. IndustryBackground & Statistics. con industry.

Recent Trends in the California Wine Grape IndustryRichard Volpe, Richard Green, Dale Heien, and Richard HowittThis article takes an in-depth lookat the changes in the Californiawine grape industry over the last 30years. In response to rising consumerdemand for California wines, thewine grape industry has expandedrapidly in acreage and production.The growth, as we show, has not beenuniform across grape varieties or thestate’s major growing regions.Wine grapes were respon sible for 8.7 percent of thestate’s total agriculturalreceipts in 2004, ranking third amongagricultural products behind dairy andgreenhouse products. Furthermore,California accounts for 92 percentof the wine grape production in theentire United States. The wine grapeindustry is therefore of great signifi cance to both the state and the nation.The article by Goodhue et al. in thisissue details several of the changesbeing observed within the Californiawine industry. These are mirrored, byand large, by trends within the winegrape industry. This article tracks thegrowth and changes of the Californiawine grape industry across the majorFigure 1. The Major Wine Grape Growing Regions of CaliforniaNorth CoastCentral CoastCentral ValleySouthern Valleyvarieties and growing regions over thelast 30 years. Special emphasis is paidto the changing face of grower returns.California’s Growing RegionsThe California Department of Foodand Agriculture divides the state into17 pricing districts for the purposes ofdata collection and presentation. Weorganized the most significant pricingdistricts into four major growingregions: 1) The North Coast, whichextends northeasterly from the SanFrancisco Bay Area and includes theNapa and Sonoma Valleys, 2) TheCentral Coast, which extends fromSan Mateo County in the north toSanta Barbara in the south, 3) TheCentral Valley, which includes theSacramento and San Joaquin Valleys,and 4) The Southern Valley, the mostvast of the four regions includingKern and San Bernardino Countiesand all points south. Figure 1 showsthe locations of the four major grapegrowing regions in California.Figure 2 reports the total grape crushin tons for the four growing regionsover the last 30 years. All four regionsexperienced sharp drops in total grapeproduction in 2006 due to droughts andbelow-average temperatures through out late 2005 and early 2006. The mostsevere impact was felt in the CentralValley, where the drought resultedin strict water cuts for grape growersand, thus, reduced irrigation. Overall,we see that production has increasedsteadily in the four growing regions.Total production in the Southern Val ley has been relatively steady since theearly 1980s, and in 2002 the CentralValley became the region producingthe most grape crush in California.Giannini Foundation of Agricultural Economics University of California7

Figure 2. Wine Grape Production in California’s Growing Regions, 1976–20061,200North CoastCentral CoastCentral ValleySouthern ValleyThousands of 819760Figure 3. Average Prices Received by Growing Region, 1976–20062,500North CoastCentral CoastCentral ValleySouthern Valley2,000 per 881986198419821980197819760Figure 4. California Red Wine Grape Acreage, 1976–200680,000Cabernet SauvignonMerlotZinfandelPinot 0Giannini Foundation of Agricultural Economics University of CaliforniaThe total production in the highquality coastal regions has grown rela tive to that in the inland areas. In 1976the North Coast and Central Coastcombined for 22 percent of Califor nia’s total grape crush. In 2006 theirshare was 36 percent. This growth isattributed mainly to the expansion ofthe Santa Barbara and San Luis ObispoAmerican Viticultural Areas (AVAs).The U.S. Department of the Treasurydivides the U.S. wine grape industryinto AVAs according to distinctiveclimate, soil, and elevation condi tions. The Paso Robles AVA, in SanLuis Obispo County, alone grew fromfewer than 20 wineries in 1990 to morethan 170 at the turn of the century.Figure 3 reports the average pricesreceived in the four growing regions.The prices are weighted by the crushcounts of the major varieties. Therehas nearly always been a significantdifference between the prices receivedin the coastal regions and those ofthe inland regions. Starting in the late1980s, this gap began to grow widerto reflect the increasing preferenceamong American consumers for highquality table wine. In the late 1990s, asignificant margin developed betweenthe North Coast and Central Coastprices. The average prices received forgrape crush in the North Coast, whichis home to the most famous AVAs inthe United States, are now significantlyhigher than those received anywhereelse in the state. Average North Coastprices, driven in part by the surgingprices of Pinot Noir grapes, are flirt ing with the 2,000/ton benchmarkwhile even those of the Central Coastremain closer to 1,000 per ton.For several years the grapes of theCentral Valley yielded higher returnsthan those of the Southern Valley.Average prices received in the Cen tral Valley have fallen in recent years,however, as much of the productionboom in that region has been associ ated with low-priced Chardonnay

Chardonnay Sauvignon BlancFrench ColombardChenin 1988198619841982198019760197810,000Figure 6. California Red Wine Grape Prices Received, 1976–20062,500Cabernet SauvignonMerlotZinfandelPinot Noir2,0001,5001,000French Colombard have fallen steadilysince the mid-1980s. Both of thesevarieties were once grown extensivelythroughout the state but, over time,production has fallen dramatically inthe North Coast and Central Coast. Theproduction of these two grapes, amongthe more easily grown in C

Wine grape Industry,” by Richard Volpe, Richard Green, Dale Heien, evolution of wine grape production in California. Acreage has expanded, Coast, and the major varieties have changed, with Cabernet Sauvignon and Pinot Noir accounting for more red wine acreage and Chardonnay a larger share of white wine acreage.