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California's Wine Glass Overfilled

Wineries and growers are facing a grape glut and an increase in imports, but consumers are not seeing a drop in prices.


First came the dot-com bust, wiping out their big-spending Silicon Valley customers.

Then, the sobering attacks of Sept. 11 almost brought their sales to a standstill.

Even now, with a sluggish economy depressing demand and a global grape glut threatening to flood the U.S. market, California's luxury winemakers refuse to admit that the party's over.

Unwilling to risk their cachet and profit margins, many in California's $33-billion wine industry are resisting lowering the price of their wines, even as unsold cases of Cabernet and Chardonnay pile up in warehouses and foreign wines win a bigger share of U.S. customers.

"I'm shocked that prices aren't half of what they were last year," said Rich Cartiere, editor and publisher of the Wine Market Report, a Calistoga, Calif.-based industry newsletter. "We are entering a period of hyper-competition. There is an enormous worldwide supply of wine and the [California] wine industry has just not adjusted. Reality has not yet set in for everybody."

Although some winemakers have reacted to the glut by shaving a few dollars off their $7-to-$12 California Chardonnays and Cabs, wineries with more-expensive labels are socking away cases to wait for a better market.

But the wait might be a long one. California wine grape growers are turning out 52% more grapes today than just seven years ago, while countries such as Australia, Chile, Argentina and South Africa are exporting more wines to the U.S. than ever before.

All this is helping to saturate the U.S. wine market. Wine analysts say it could take five years to work through this supply, especially because wine sales in the U.S. are flattening. In the process, a number of smaller California growers will be forced out of business as the glut of grapes keeps prices low.

No one will have to work harder to move their wines than California's high-end winemakers, which have watched their business plummet in the last year as consumers cut back on travel and white-tablecloth dinners, and in general buy less wine or lower-priced varieties.

Yet many winemakers refuse to discount their goods, either because they have high land costs or are afraid they will tarnish their image and not be able to command the same lavish prices when supply and demand fall back into balance.

Robert Mondavi Inc., for example, does not plan to lower the price of its luxury wines, despite slowing sales. Instead the Oakville-based winery, whose sales declined 8% in fiscal 2002 from the previous year, is giving economic incentives to distributors to push its wines.

Beringer Blass Wine Estates, a unit of beverage giant Foster's Group Ltd., is actually raising prices, funneling excess Chardonnay grapes from its Santa Barbara County Meridian vineyard into an even pricier new label called White Hills, set to debut this month.

But that will be the exception rather than the rule, analysts say.

Most large winemakers may not have a choice about discounting, given the amount of good-quality, affordable wine flooding in from around the world.

Even before this year's harvest began last month, the pace of domestic wine sales in supermarkets, drugstores and discounters had begun to slow, inching up a paltry 1.4% in the 52 weeks ended July 14, according to Chicago-based Information Resources Inc.

Meanwhile, sales of Australian, Italian and other imported wines shot up 12.5% in the same period, according to IRI, upping their share of all U.S. wine sales to 17.9% from 16.7% the year before.

"This will be a defining year for most producers here in California when you combine the excess inventory that's out there ... and the economic slump across the board," said George Rose, a spokesman for British beverage giant Allied Domecq, which owns such brands as Clos du Bois, Buena Vista, Callaway and Mumm Cuvee Napa. "The bubble has definitely burst."

Unlike some of its luxury wine competitors, Allied Domecq has begun trimming a few dollars off the prices of its Sonoma County wines to boost sales. At the same time, the company is planning lower-priced wines under new brand names to shed excess juice.

The good news for consumers is that this should mean better-quality wine at all price levels, from the $7 bottle of Sauvignon Blanc to a $120 reserve Cabernet.

"What it takes to get a 95 [top rating] in Wine Spectator today is a lot different than it was 10 years ago. And it's going to get a lot harder," said Jim Watkins, who heads Beringer Blass operations in the Americas.

The increase in wine quality is partly the result of growers thinning and pruning their vines to reduce production. Fewer grapes on the vine mean more intense flavor.

"[Vintners] are very excited about the fruit quality this year. It will be a tremendous vintage year," said Karen Ross, president of the California Assn. of Winegrape Growers.

But even with this pruning, California's 2002 wine-grape crush is expected to be 3.3 million tons, about 10% larger than last year's. That has sent grape prices plunging as much as 50% on the open market.

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