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Two-Buck Chuck the Toast of Napa

For the wine industry, it's a mixed blessing

September 26, 2003|Jerry Hirsch | Times Staff Writer

In the premium wine region of Napa Valley, residents have found a new love: Two-Buck Chuck.

Since Trader Joe's opened its first store in Napa two weeks ago, the privately held grocer and primary purveyor of the Charles Shaw brand has sold nearly 1,200 bottles a day of the $1.99 wine.

The frenetic buying is a testament to the upstart label's mesmerizing hold on California's wine industry. Indeed, today, half a mile down the highway from the grocery store at the Napa Valley Marriott, local vintners will gather for their annual industry symposium where one of the main topics will be Two-Buck Chuck and how it has transformed their business.

Analyst Jon Fredrikson estimates that Bronco Wine Co. will ship about 6 million cases of Charles Shaw this year, accounting for about 12% of all California wine shipments within the state.

Although some vintners have complained that Chuck's immense popularity has undermined major brands and shaken up an already struggling industry, the picture is in fact much more complicated.

At the symposium, UC Davis wine-business researchers will present findings of a survey in which 6 of 10 wine executives believe that Charles Shaw has helped the industry by depleting excess wine and grape supplies and by creating buzz for California wine in general.

What's more, as Bronco has lowered the bar on the price consumers are willing to pay for a bottle of wine, that has created an ever larger market for low-priced wines and spawned a number of similarly priced clones.

"One thing holding back wine consumption is that quality wine is too expensive in the U.S.," said one survey respondent. "I think in the future we will see the price pyramid change and become a lot fatter at the bottom."

Even the venerable Robert Mondavi Corp., which has seen its Woodbridge line hurt by Charles Shaw and inexpensive imports from Australia and South America, said last week that it would launch a brand in the $3.99-to-$4.99 range.

At the same time, whether Two-Buck Chuck will remain such a juggernaut is a matter of considerable debate.

The UC Davis survey found that 83% of industry respondents believe the rise of Charles Shaw will prove a short-lived event made possible by the three-year grape glut. They figure that even though Ceres, Calif.-based Bronco has been able to snap up quality bulk wine and grapes at fire-sale prices, its supply is gradually dissipating. Before long, some suggest, the closely held company may be forced to either raise the price or let the quality slide.

"The great bulk of the people in the wine industry think this is a phenomenon of the surplus," said Robert Smiley, dean of the UC Davis Graduate School of Management, who was involved in the survey of 245 wine executives. "My assessment is that they are right, and that the Charles Shaw brand can't sustain its cache or its quality."

Smiley remembers just four years ago, when wineries were selling every drop they could ferment and, in the process, frequently raising prices. As soon as the industry cycles back to a tighter market, he believes, grape growers will be unwilling to accept what Bronco now pays for its Charles Shaw fruit -- less than $200 a ton, according to many in the industry. Without a glut, those same grapes might fetch at least $250 a ton.

Moreover, some in the industry speculate that the 200-store Trader Joe's chain is tiring of a brand that carries a razor-thin profit margin and that is luring many of its customers away from more expensive wine purchases.

Trader Joe's concedes that the pace of sales for Charles Shaw has slowed since winter -- the activity at its new Napa store notwithstanding. Neither Bronco nor Monrovia-based Trader Joe's will release exact figures.

Yet others believe that any predictions of Charles Shaw's demise are premature.

Steve Schafer, a grower in Madera and chairman of the California Wine Grape Growers Assn., said that at recent wine industry meetings, Bronco Chief Executive Fred Franzia made public pronouncements that his company can continue to produce the Shaw label, even if it has to pay more than $200 a ton for grapes. (Bronco also has its own vineyards stretching over an estimated 25,000 to 30,000 acres -- holdings that would make it the largest grape grower in California.)

"I know Fred likes to stir up the pot," Schafer said, "but if you worked the numbers I think you can do it."

If Bronco were to pay suppliers as much as $225 a ton, its production cost per bottle would run about $1.40, including processing, packaging, labor and taxes, according to people familiar with the winery's operations. Even at $250 a ton, the production cost would increase only by about 3 cents a bottle, leaving Bronco and Trader Joe's with enough profit to make the brand worthwhile as long as the sales volume holds up.

Most important, both Bronco and Trader Joe's, which has a near-exclusive arrangement to sell Two-Buck Chuck, say the wine is here to stay -- at least for the foreseeable future.

"Historically in this business, a brand like this either moves up in price or goes out," said Bronco spokesman Harvey Posert. However, that may not necessarily apply in the case of Two-Buck Chuck. After all, said Posert, "there has never been a wine with this type of consumer franchise."

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