Wine

INDUSTRIAL CODES

NAICS: 31-2130 Wineries

SIC: 2084 Wines, Brandies, and Brandy Spirits

NAICS-Based Product Codes: 31-213001, 31-21300111, 31-213002, 31-21300221, 31-213003, 31-21300331, 31-213004, 31-21300441, 31-213005, 31-21300551, 31-213006, 31-21300661, 31-213007, 31-21300771, 31-213008, 31-21300881, 31-21300891, 31-213008A1, and 31-213008B1

PRODUCT OVERVIEW

Wine, one of the oldest products enjoyed by humankind, has been a part of civilization dating back to before the Bronze Age. In the United States, however, the passage of the Prohibition Act of 1919, also known as the Volstead Act, nearly destroyed the industry. While a few wineries survived by making medicinal and sacramental wines, production dropped 94 percent between 1919 and 1925. Even after the repeal of Prohibition, recovery of the industry was slow. Before 1920 there were more than 2,500 commercial wineries in the United States. Fewer than 100 survived Prohibition, and by 1960, the number of commercial wineries had grown to only 271.

In the early 2000s, adult Americans are drinking less wine per capita than are adults in Canada, the United Kingdom, Australia, France, and Italy. Wine consumption is up substantially in the United States, however, and the wine industry has become a major contributor to the economy. The U.S. Census Bureau reported that wine shipments totaled $10.5 billion in 2005. The California Association of Winegrape Growers reported that in 2006 grape production in the United States accounted for 9.6 percent of world grape production, behind Italy, France, and Spain, and for 6.3 percent of world wine production, behind Italy, France, Spain, and Argentina.

California dominates the industry in the United States, making 90 percent of the wine produced in the country. Exports of California wine increased from a value of $641 million and a total of 282 million liters in 2003 to $672 million and 382 million liters in 2005. However, major wineries are found in other states, and small wineries are beginning to proliferate throughout the country. According to WineAmerica, the national association of American wineries, there were wineries in all 50 states in 2006. Approximately 45 percent of the nation's 4,280 wineries are located in California, Washington, Oregon, New York, Virginia, Texas, Pennsylvania, and Michigan, with each state having more than 100 wineries.

The number of wineries quadrupled from 919 in 1980 to 3,726 in 2004. In 2005, 460 new wineries applied for licenses. In 2006 there were an estimated 90,000 wine labels registered in the United States. In fact, the wine industry encompasses both large and small businesses. The top 30 U.S. companies produce more than 90 percent of U.S. wine. According to the Small Business Administration, however, 98 percent of the wineries in the United States in 2002 were considered small, meaning companies that employ fewer than 500 people.

The industry is tightly regulated, both by the federal government and by a network of state laws, with some allowing wine sales in a variety of places, including grocery stores and discount retailers, and others permitting wine sales only in state-owned liquor stores. A customer must be at least 21 years of age to purchase wine in all 50 states, but the legal age is 18 in Puerto Rico, the U.S. Virgin Islands, and Guam.

The basics of wine making

The production of fine wines is a complex process; some call it an art. In the most basic terms, wine is made in the following manner:

• Wine production starts once grapes have been harvested. After harvesting, grapes are crushed. In making white wines the skins and seeds are removed. For red wines, the seeds and skins are left in the juice.
• The juice is transferred into stainless steel tanks and cultured yeast typically is added for the fermenting process. Wine fermentation occurs when yeast consumes the sugars in the grape juice and converts them into approximately half-alcohol and half-carbon dioxide gas by weight.
• Following the fermentation process the wine is poured into barrels typically made of oak, for aging. During aging the winemaker carefully monitors the wine. Wines are "racked" during this period, which means they are pumped from one barrel to another and the solids at the bottom of the barrel are removed.
• After its initial aging, wine is bottled and the aging process continues at a slower pace.

Wine has long had a special place in many cultures. Chemical tests on ancient pottery jars show evidence of wine production before the Bronze Age, c. 3500–2900 BC. One of the oldest written accounts is in the Old Testament, which says that Noah planted a vineyard and made wine. Early production of wine occurred around the Caspian Sea and in Mesopotamia. Egyptians, who developed the first arbors and pruning methods, were enjoying wine c. 2700–2500 BC. The consumption of wine was spread to Europe by the Greeks, while the Romans made major contributions to grape growing, including improved classification of grape types, recognition of preferred soils, and pruning, irrigation, and fertilization methods.

Monastic wineries helped to establish and nourish the vineyards that brought France to dominance in wine production, and the need for sacramental wines preserved the industry through the Dark Ages. Dom Perignon, a sixteenth-century Benedictine monk, is credited with inventing the process of making champagne.

In the United States, wine production followed very different tracks on the East and West Coasts. On the East Coast, settlers tried to grow European grape varieties, but all attempts failed because of climate and natural pests, especially powdery mildew, a fungal disease, and a root louse called phylloxera vastatrix. This root louse was so destructive that when native American vines were planted in botanical gardens in England, it achieved a foothold in Europe and devastated nearly all the vineyards there in the years between 1865 and 1885. The European wine industry was saved by the grafting of European vines onto rootstocks from America that were immune to the root louse.

By the end of the eighteenth century, Americans living on the East Coast began domesticating native grapes. The Concord grape, introduced in 1852, became the predominant variety east of the Rocky Mountains.

In 1833 the West Coast was introduced to wine production when imported European grapevines arrived in California. In the 1850s and 1860s, Agoston Harazsthy, a Hungarian merchant and promoter who was partially financed by a state grant, made several trips to Europe and brought back cuttings from 165 of the finest vineyards. The vines flourished in California. Catholic missionaries also contributed to the production of wine in California. They established missions along the coast and planted vineyards in each. Father Junipero Serra, who founded nine of these missions, is known as the Father of California Wine. His grapes, descended from earlier plantings from Mexico, became known as Mission grapes.

Concerns about the effects of wine consumption, including alcohol abuse and alcoholism, led to support for prohibition. Indiana adopted the first temperance law in 1816, which forbade the sale of liquor on Sunday. A number of towns and counties went completely "dry" in the years that followed, and in 1851 Maine adopted a statewide prohibition of the manufacture and sale of liquor. By the outbreak of World War I, 33 states were dry. The Volstead National Prohibition Act in 1919 and the eighteenth amendment to the Constitution in 1920 banned the manufacture, transportation, and sale of beverages containing more than 0.5 percent alcohol. The experiment was not successful, however, and in part because of crimes such as bootlegging by gangsters and others, the Prohibition Act was repealed in 1933 by the nineteenth amendment.

In spite of the repeal, recovery of the wine industry was slow. Some states stayed dry, and others established state liquor stores as monopolies with limited selection and no marketing. A maze of confusing and contradictory laws from one geographic area to another and a lingering anti-alcohol sentiment discouraged the acceptance of wine consumption. After repeal, the first group of wines to gain popularity was fortified dessert wines because they were taxed at a lower rate than were distilled spirits but still contained 20 percent alcohol. Table wine sales did not overtake fortified wine sales until 1968. In the early 2000s approximately 40 percent of U.S. adults drank wine occasionally, and approximately 14 percent drank it at least once per week, according to a study commissioned by the Wine Institute, an advocacy group for California wineries.

MARKET

Wine has gained respectability and popularity with a substantial majority of the U.S. population, however, and the U.S. market for wine is growing. Sparkling wines such as champagne are viewed by many as enhancements to weddings and other celebrations, and table wines are seen as enhancements to fine dining.

The Census Bureau reported that the value of wine shipped in 2005 in the United States totaled $10.5 billion, compared to the 1992 figure of $4.3 billion. The Census also reported that Americans drank 2.3 gallons of wine per capita in 2004. The Wine Market Council, an independent, non-profit, wine industry trade association, reported that the consumption of table wine in the United States exceeded 250 million cases for the first time in 2006.

The retail value (as opposed to the wholesale shipped value) of California wine in 2005 was estimated at $16.5 billion, excluding exports and winery direct sales, an 8.6 percent increase over 2002.

An annual study in 2007 by the organizers of the Vin-Expo trade fair in Bordeaux, France, predicts that in the succeeding five years, the United States will surpass France to become the world's largest wine market. Although U.S. per-capita consumption is expected to remain low compared to that of France and Italy, the total market for domestic and imported wines is expected to increase from $19.2 billion in 2005 to $22.8 billion by 2010. U.S. consumption is expected to grow from 607.6 million gallons in 2005 to 721.2 million gallons in 2012, while French consumption is expected to fall from 723.8 million gallons to 657.8 million gallons. Italian consumption is projected to be 718.5 million gallons by 2010, second only to the United States.

The study demonstrated that Chinese wine consumption grew 13.06 percent been 2004 and 2005 to 423.2 million liters or 564.26 million bottles. Wine consumption in China is expected to grow by an additional 35.44 percent by 2010. The fastest growth rate in the United States is expected to be for bottles that cost more than $5, with people generally drinking better-made and more expensive wines.

According to the Wine Market Council study, wine sales in the United States surged beginning in 1970 and declined during the 1980s. The decline was attributed to the nationwide increase of the drinking age to 21, health and fitness concerns, label warnings for sulfites and for pregnancy, and lowered legal state blood-alcohol levels in driving-under-the-influence laws.

Beginning in 1994 sales climbed steadily and continued to grow in early 2007. The council attributed the renewed growth to a number of factors. These factors include the reports that moderate wine consumption is good for health. Increased and improved marketing campaigns also contributed to the increase in sales. Another factor is that the large Millennial Generation (those born between the mid-1970s and mid-1980s) was beginning to consume wine at younger ages than had earlier generations.

The Wine Institute's economic impact report said that the U.S. wine market increased by 13.7 percent in volume and by more than 15 percent in dollar values between 2002 and 2006. The Institute believes that several factors drive this growth.

Wine is generally viewed favorably when consumed in moderation with a meal. Twenty-five percent of households had incomes in excess of $75,000 in 2006, and these relatively high-wage earners increasingly accepted wine as an affordable luxury. People are searching for special experiences as opposed to materials things. Some people see an environmental association between wine and the land.

The ACNielsen annual survey of the beverage alcohol market showed that overall wine dollar sales rose by 11 percent in the 52 weeks ending July 1, 2006, while case sales were up by 4 percent, another indication that consumers were buying wine at higher prices in 2006 than in 2005. Chardonnay was the top-selling variety, with 26 percent of the market in dollars and 10 percent in case volume. Merlot was second, and cabernet sauvignon third. The study also found that sales of single-serving 187-ml. bottles of wine were growing much faster than were overall wine sales, a trend accounted for by consumers' desire for convenience and versatility.

According to the 2007 survey one year later, sales continued to increase for most varieties of wine. Pinot noir (up 20.3 percent in dollars), pinot gris/grigio (up 17.9 percent), and Riesling (up 25.2 percent) increases were especially strong. Cabernet sauvignon, starting from a much higher base, was up by 11.1 percent. Average price per bottle increased by 4.1 percent. There were 423 new wine brands that sold at an average of $8.06 per 750-ml. bottle. Sales of wine contained in screw-capped bottles increased by 24.6 percent to 4 percent of all 750-ml.wine sales. Domestic sales increased by 7.2 percent and imports, 6.2 percent. Wines from North Carolina, Texas, and Washington State made especially large gains.

Both industry organizations and individual companies supported aggressive marketing campaigns. In one promotion, for example, E. & J. Gallo Winery and Safeway supermarkets collaborated on an affinity merchandising program for the November-December holiday season that brought meat and wine categories together and provided food-wine pairings. The program resulted in substantial dollar growth of the featured Gallo brands as well as a smaller increase for the entire wine category.

The 2006 Valassis Annual Coupons Report listed wineries as sending out the greatest number of coupons to prospective customers that year, the first time wine was included in the study. Ratings by popular wine magazines, although subjective, also affect the market for particular wines and offer an opportunity for additional promotions. In one case, Wine Spectator rated a 2004 cabernet sauvignon from an Argentine winery at 90, a rating promoted by K&L Wine Merchants, a large San Francisco retailer. Sales soared.

On the negative side, the industry remains concerned about barriers to exports and competition from imports. U.S. industry representatives say the industry faces protectionist tariffs, distribution restrictions, and price competition from foreign producers who receive government subsidies. According to the Department of Agriculture, U.S. wine exports declined by 17 percent in 2005 to $659 million from a record high of $795.5 million in 2004. The 2005 figure was still higher than the totals for 2000 through 2003. Major markets for U.S. wine exports include the United Kingdom, Canada, Japan, Italy, and the Netherlands. Meanwhile, wine imports in 2005 reached a record high of $3.79 billion.

The Wine Institute reported in early 2007, however, that U.S. exports in 2006 had risen to $876 million, indicating that the 2005 decrease was an aberration because of a number of factors. Figure 232 shows U.S. wine exports for the years 1996 through 2006.

Imports of wine to the U.S. market rose steadily from 1996 to 2006, according to the Wine Institute's 2006 report. Imports represented more than 27 percent of wine consumption in the United States in 2006, rising from 40 million cases in 1998 to 81 million cases in 2005. Italy continued to be the major supplier, followed by Australia and France. One brand, Yellow Tail, represented 36 percent of Australia's imports to the United States. Imports from New Zealand and South Africa increased rapidly, with South African wines equaling those imported from Spain for the first time. Attracted by the growing market for mid-priced and more expensive wines in the United States, foreign wine producers developed aggressive marketing campaigns.

The California Association of Winegrape Growers (CAWG) challenged the practice of buying bulk inexpensive wine imports, blending them with California wines, and selling them as American wines. Much of the imported bulk was coming from Australia. In early 2007 CAWG also hired Weber Shandwick, one of the world's largest consumer marketing agencies, and Cronin Com-munications, a California firm well-known in the food and beverage industry, to launch a campaign to promote California wines. In early 2007 the group had raised $300,000 toward the $500,000 goal for the campaign from voluntary contributions, and was considering the possibility of a mandatory assessment.

KEY PRODUCERS/MANUFACTURERS

The top 30 wine companies by U.S. case sales represent more than 90 percent of the U.S. wine market, according to Wine Business Monthly's survey of 2006 producers. While the number of large wineries declined because of consolidation at the time of the survey, the total number of wineries had increased, with nearly 300 new wineries opening in the United States in 2006.

E. & J. Gallo

Owned by the Gallo family, this industry leader was ranked number one in 2006 with annual U.S. case sales of 62 million. In more than 70 years of operation, Gallo has built a network of wineries located throughout California, more than 3,000 acres of vineyards in the state's Napa and Sonoma valleys, operations throughout Europe and the Americas, and a worldwide distribution system. Gallo employs more than 4,600 people and markets its wines in the United States and in more than 90 foreign countries. In 2005 the company reported sales of $2.7 billion and a one-year growth rate of 10 percent.

In addition to the Gallo brand, the company sells table wines under the Turning Leaf, Redwood Creek, Bridlewood Estate, Frei Brothers Reserve, Louis M. Martini, MacMurray Ranch, Marcelina Vineyards, Mirassou, Napa Valley Vineyards, and Turning Leaf Sonoma Reserve labels, among others. Less expensive wines, marketed as Carlo Rossi, Livingston Cellars, Peter Vella, and Wild Vines, are often sold as jug or boxed wines. Gallo also markets imported wines under such names as Bella Sera, Black Swan, DaVinci, and Whitehaven. Gallo sells wines to restaurants and hotels under the names Burlwood, Copperidge, Liberty Creek, and William Wycliff Vineyards. Gallo also sells sparkling wines and distilled spirits, including E & J Brandy, and the fortified Thunderbird brand.

Constellation Brands

This company is the second-largest winery in the United States, with sales of 57 million cases in 2006. It markets itself as the largest maker of wine by volume in the world. Constellation offers such volume brands as Almaden, Banrock Station, Inglenook, and Vendage, as well as such premium wine brands as Estancia, Ravenswood, and Simi. Three of the most successful new brands in 2005 were Twin Fin and 3 Blind Moose from California and Monkey Bay from New Zealand. In all, the company markets more than 250 alcohol brands in nearly 150 countries. It operates more than 50 production facilities and has 10,000 employees worldwide.

Constellation reports annual sales of $5 billion, but for the three months that ended Nov. 30, 2006, the company had an even higher rate of $1.5 billion for the quarter. The Sands family controls approximately 88 percent of voting stock.

The Wine Group

The third-largest winery in the United States, with 42 million cases sold in 2006, was founded in 1981 through a management buyout of the wine assets of the Coca-Cola Bottling Co., including Franzia Brothers, Mogen David, and Tribuno. The Wine Group's Franzia is among the best-selling U.S. boxed wines. The company also offers bargain-priced wines Corbett Canyon and Mogen David Kosher, as well as Lejon and Tribuno vermouth. Other Wine Group brands include Concannon, Casara (an Italian wine), Fish Eye, Foxhorn, and Glen Ellen. It has launched wine-producing ventures in Chile, South Africa, Australia, and New Zealand, and signed a September 2006 strategic partnership agreement with the GCF Groupe in France to promote its products in the European Market. The Wine Group earned the "Winery of the Year Award" at the 2005 Unified Wine and Grape Symposium in recognition of management excellence.

Bronco Wine Company

Based in Ceres, California, this company is ranked fourth with 22 million cases sold in 2006. It produces wines under the ForestVille, Estrella, Charles Shaw, Montpellier, Silver Ridge, Rutherford Vintners, FoxHollow, and Napa Ridge brands, among others. Bronco is known for its promotion of its Charles Shaw wine as Two-Buck Chuck, which has sold millions of cases for $1.99 per bottle at Trader Joe's stores. Bronco controls 30,000 acres of California vineyards and processes approximately 300,000 tons of grapes, but much of its 22 million gallons is sold in bulk to other wine companies.

The Bronco Wine Company was formed in 1973 after Coca-Cola bought the Franzia family wine business. The founder was Fred T. Franzia, a nephew of Ernest Gallo, along with his brother and cousin. In 1993, Fred Franzia and the company were indicted on federal conspiracy charges for misrepresenting cheaper grapes as premium zinfandel and cabernet sauvignon. Bronco pleaded no contest and paid a $2.5 million fine. Franzia pleaded guilty, paid a $500,000 fine, and agreed to stay away from grape purchasing for five years in lieu of serving time in prison. Franzia also has had legal battles with other California winemakers over the company's use of Napa and other such appellations on its labels. Franzia sued the state over a 2000 law that tightened federal-labeling laws, lost, appealed to federal court, and lost again.

Foster's Wine Estates

Shipping 16 million cases in 2006, this company ranks as fifth largest in the United States. The company, formerly Beringer Blass Wine Estates, is a subsidiary of Australia's Foster's Group, which produces and markets beer, wine, spirits, cider, and non-alcohol brands. The Foster's Group bought the company in 2000 from the Texas Pacific Group and combined it with its Mildara Blass holding. Foster's produces premium wines from its vineyards in Australia, California, Chile, and Italy. Company brands include Black Opal, Blue Marlin, Chateau St. Jean, Greg Norman Estates, and Lindemans. Its North American brands are Beringer, Etude, Stag's Leap, and Chateau Souverain.

MATERIALS & SUPPLY CHAIN LOGISTICS

Grapes are the main ingredient in wine, and U.S. wine grape growers face heavy competition from abroad. Wine Business Monthly reported that the status of the grape market in 2005 and 2006 was weak, particularly because of a 2005 bumper crop both in California and in Australia, which shipped large quantities of bulk wine to California. As a result, many California grapes were left on the vines.

A marketing report for the Wine Institute said the growth of wine sales through the 1990s created a vast expansion in California wine-grape planting, which hit its peak in 1998. By 2002 prices began to drop, and most vineyards stopped planting and, in some cases, removed vines. Demand continued to grow, however, and the market was coming into balance, a trend delayed by the heavy harvests in 2005 and 2006.

The report explained that there is a lag between harvesting and bottling. California red wines usually age in barrels for up to three years, while white wines usually age for one year. This explains a decrease in 2005 production, when California produced 2.7 billion 750-ml.-bottle equivalents of wine, compared with 3.12 billion bottle equivalents in 2002, a 15.6 percent decline. Wine production in 2005 reflected the smaller 2002 harvest for red wine and the 2004 harvest for whites.

In late 2006 CAWG noted that wine imports were expected to increase to 30 percent of the U.S. market by the end of the year. By 2007 the situation had eased somewhat for grape sales, helped by smaller crops, particularly in Australia. In February 2007, halfway through the harvest, the Australian Wine and Brandy Corporation estimated that the harvest would be one-third smaller than it was in 2006.

Demand and reliance on exports are also affected by shifts in popularity of various varieties. In the mid-1990s, few pinot grigio or Shiraz grapes were planted in the United States, but wines from these grapes became very popular, and wineries imported the grapes. Ten years later, the growers had planted abundant amounts of pinot grigio and Shiraz grapes, but pinot noir and Riesling grapes were in short supply and were being imported.

California dominates the U.S. wine industry, and most wine grapes are grown there. In the United States in 2005 there were approximately 935,000 acres of grapes under cultivation and of that number, 800,000 of them were cultivated in California, according to WineAmerica. The 2005 grape crop was valued at $3.46 billion, with California producing $3.12 billion of that amount.

The U.S. Department of Agriculture reported that the 2005 crush of red wine grapes in California was 2.027 million metric tons, up 36 percent from the 2004 crush of 1.486 million metric tons. The 2005 crush of white wine grapes was 1.379 metric tons, up 34 percent from the 2004 crush of 1.03 metric tons. Other grape varieties produced in California in 2005 included 423,000 metric tons of grapes for raisins and 96,000 metric tons of table grapes.

The 2005 California Grape Acreage Report noted that wine-bearing acreage increased 0.9 percent from 473,000 acres to 477,000 acres, but non-bearing acreage increased 12.5 percent from 40,000 acres to 45,000 acres, a statistical affirmation of reports from grape growers that vines were being pulled up in an effort to reduce the supply and improve prices. Each acre of grapes is estimated to produce between $15,000 and $75,000 of gross sales value as bottled wine. Despite the huge crop, wine grape prices actually increased in 2005, an indication of the continuing expansion of demand. Average per-ton prices for the 2005 wine crop were $574.69 for red, up 1 percent from 2004, and $459.38 for white, up 4 percent from 2004.

Washington State wine-grape growing and wine production were expanding rapidly. In 2005 the grape harvest totaled 110,000 tons, up three percent from 2004. Growers received an average of $930 per ton for all varieties in 2005, an increase of $5 over 2004. Chardonnay was the top variety at 26,000 tons. Merlot ranked second at 20,500 tons. Washington wineries produced 67.5 million liters of wine in 2005, up from only 7.5 million liters in 1981. There were only 19 wineries in 1981 but more than 400 in 2006, making Washington the second-largest wine-producing region in the United States for premium wines. Oregon wine grape production in 2005 was 25,000 tons. In New York, 46,000 tons of grapes were crushed for wine that year.

In a positive development in the U.S. grape industry, CAWG and the Wine Institute are promoting and many farmers are adopting the concept of sustainability, the employment of wine-growing and winemaking practices to "conserve natural resources, protect the environment, and enhance relationships with employees, neighbors, and local communities." The program, which includes a workbook and educational workshops for participating growers, is supported by a $280,000 grant from the California Department of Food and Agriculture. Thousands of growers and vintners have participated to learn about sustainable practices, and more than 1,000 have self-assessed their vineyards and winery operations.

Other materials that must be purchased by wineries include bottles, boxes and bags in boxes, barrels, corks and other bottle stoppers, and wine labels. The 2006 economic impact report estimated that California wineries spent $467 million on glass. A February 2007 Wachovia Capital Markets report on the container and packaging industry said that wine bottles represent 5 percent of the North American glass-container market. The report added that beer and wine bottles showed the only growth in the glass packaging industry.

A recent development is the increasing popularity of PET (polyethylene terephthalate) plastic bottles for 187-ml. single-serving bottles. These bottles cost more than glass, particularly since plastic is made of petroleum and prices for this commodity are high. PET bottles have a number of advantages, however, including the fact that the bottles are lighter and cost less to ship. PET bottles also allow people to enjoy wine in places where glass is not allowed such as in music and sports venues. The bottles also are being promoted for service to airline passengers.

The economic impact report says that in 2006 wineries spent $10.4 million on corks, capsules, and screw tops. More than 15 billion cork stoppers are produced each year for the wine industry, and these corks comprise almost 70 percent of the value of the market for natural cork, which comes from the bark of cork oak trees that have grown near the western Mediterranean Sea for thousands of years. The majority of cork comes from Portugal and Spain.

Approximately five percent of wine in bottles with traditional corks is corked, a term that refers to off-odors and taints from contaminated cork. There is a move to replace traditional corks with plastic stoppers to avoid this problem, but it is difficult to get corkscrews into the plastic and to replace the stoppers in half-empty bottles. Nomacork, a North Carolina company that is one of the two leading producers of synthetic corks, reported in 2004 that it had 20 percent of the U.S. cork market. The company expects to have at least 6 percent of the world market by the end of the year. Nomacork said that with distribution in more than 35 countries, it has more than 30 percent of the synthetic closure market.

In March 2007 the just-drinks.com editorial team reported that synthetic corks are expected to reach 6 billion units by 2010. In 2006 synthetic corks represented 12.6 percent of an industry that purchased 19.6 billion bottle closures. Screw caps also are increasing in popularity, with an 80 percent increase in sales from 2003 to 2007, according to the just-drinks team.

DISTRIBUTION CHANNEL

An estimated 98 to 99 percent of wine in the United States is sold through the traditional three-tier system of producer-wholesaler-retailer, governed by a number of legal limitations that vary from state to state. The wholesale section, however, has experienced dramatic consolidation. In 1991 the top twenty U.S. wine and spirits wholesalers and distributors earned $7.5 billion in sales. From 1990 to 2000, the number of wine wholesalers and distributors declined by more than 50 percent, largely through mergers and acquisitions. By 2005 the top five U.S. wine wholesalers and distributors earned $14.5 billion in sales or 43 percent of the total wine and spirits market.

The largest wholesaler is Southern Wines & Spirits of America, which has operations in more than 20 states. The company also owns Premier Wine & Spirits of New York, and has large stakes in Pacific Wine & Spirits and Romano Bros. Beverage in Illinois. At the same time, retail consolidation occurred in the form of discount and big-box stores, which handle an increasing share of the wine market and have the power to reduce wholesalers' profit margins by pressing for price and promotion concessions. The changes have been especially hard for the growing number of small wineries, who find it difficult to gain access to the national market. This forces them to spend more on sales and marketing or to hire independent marketing services and brokers.

The Wine Institute reported that California wineries garnered $870 million in winery direct sales in 2006, compared to $350-$400 million in 2004. These direct sales are an increasingly important channel for California's small wineries. Direct sales include sales to consumers in winery tasting rooms, wine clubs, and on winery mailing lists. The principal channel for these sales, at about 60 percent of the total, is the winery tasting room. E-commerce or Internet sales constitute the smallest segment, generally in the range of 3 to 5 percent of total direct sales.

In May 2006 Wine Business Monthly, in its annual report on tasting rooms around the country, stated that 68 percent of all sales from small wineries—those producing fewer than 5,000 cases per year—are made through tasting rooms. For larger wineries—those producing more than 500,000 cases of wine per year—only 23 percent of sales were made through tasting rooms. Approximately 10 percent of wineries maximized sales with multiple tasting rooms in locations other than their own wineries. Some smaller wineries also joined vintner collectives, with sales locations in areas of high tourist activity.

West Coast survey respondents reported that wine sales generated 86 percent of the revenue in their tasting rooms, with wine accessories, food, wineglasses, and clothing making up the rest. The wine sale percentage for tasting rooms in locations other than the Western states was slightly lower. E-commerce received a boost in 2005 when the Supreme Court ruled that states cannot discriminate in favor of their in-state wineries by allowing them to make shipments to in-state consumers while prohibiting sales from out-of-state wineries. Under this ruling, wineries could begin marketing their products across the country online. Those opposing the ruling expressed concern over the potential increase in alcohol sales to minors. In response, the Wine Institute said in August 2006 that in the 33 states then allowing direct wine shipments, procedural safeguards were in place. Common-carrier drivers, for example, were required to obtain the signature of a person 21 years or older before delivering wine. After the decision, some states opened up their markets while others stalled, either ignoring the requirement or adding so much paperwork and so many permit fees that most small wineries decided it was not worth the effort to try to sell to consumers in those states.

New ventures developed to take advantage of online marketing. Folio Fine Wine Partners, a wine importer founded by the Mondavi family, introduced the online service called WineDriver. This service allows consumers to look up a folio wine they are seeking and find the name of distributors in their state. They can then give this information to a retailer who can obtain the wine for them from an in-state distributor. In addition to helping consumers, this approach allows retailers to sell a wider variety of wines without having to keep them on the shelves.

The REThink Wine Trade System, created by the Inertia Beverage Group, a consulting firm that manages and tracks wineries'online sales, was introduced in several states by 2007. In this system, a restaurant or retailer can place an order directly on a winery Web site. These orders are then routed through designated wholesalers, who handle billing and tax payments. Online orders are increasing, according to Inertia. In a report covering the first half of 2006, Inertia said clients had increased their online sales by 423 percent over the same period one year earlier. Data were based on online sales by more than 250 clients. Expensive bottles were the most popular, with 53 percent of the wines priced at $30 to $50 per bottle.

Self-distribution is another issue that has been affected by the Supreme Court decision on online sales. In Washington State, for example, Costco sued over a state law that allowed local wineries to self-distribute their wines to retail outlets, but forbade out-of-state wineries to sell to those same outlets. Costco won, and Washington passed a law in 2006 allowing unlimited self-distribution by wineries that obtain licenses. Results have been mixed in other states, with many capping the amount of wine that a winery can deliver directly to retailers in a single year.

The Statistical Abstract of the United States: 2007 lists outlets for liquor sales, but does not provide details of sales of wine or specifically list online sales. Data for 2004 showed that $30.1 billion of the $61.4 billion in packaged alcoholic beverages were sold at liquor stores, $18.5 billion at food stores, and $12.8 billion at all other outlets, including tasting rooms and online. For alcoholic drinks, $55.8 billion of the $81.6 billion total was sold at eating and drinking establishments, $19.6 billion at hotels and motels, and $6.2 billion at all other.

KEY USERS

Consumers must be 21 years of age or older to purchase wine in all 50 states. In that sense, all adults can be viewed as potential wine buyers. However, only 40 percent of U.S. adults drink wine even occasionally and only about 14 percent drink wine at least once a week. Per capita U.S. wine consumption is thirty-eighth in the world, but the United States is one of the few markets in which demand for wine is growing.

Wine associations and companies have conducted research to better understand this market and to find ways to expand it. The Wine Market Council commissioned Merrill Research to conduct its first consumer survey in 1994. Studies were repeated in 1997, 2000, and 2003. Beginning in 2005 the survey was conducted annually. In addition, the council met with a number of focus groups with core and marginal wine consumers segmented by age and gender.

One conclusion reached from these surveys is that there is a strong demographic element in the wine market. A wine-consumption boom occurred in the 1970s and early 1980s when the Baby Boom generation (those born between 1945 and the early 1960s) matured with tastes and choices quite different from earlier generations, including a preference for wine, particularly white wine. The market then sagged from the mid-1980s to the mid-1990s, with Generation X adults (those born between 1965 and 1980) coming of age and having little interest in wine until they reached their thirties. The Generation X population, moreover, was smaller, with 77 million baby boomers in 2006 and only 44 million gen-Xers.

The Millennial Generation, numbers 70 million, and for a variety of reasons, is developing a taste for wine at a younger age, driving total wine consumption steadily higher. Women in this age group tend to prefer wine over beer, and since women make the majority of wine purchases, their interest has led to more wine consumption in social situations.

Another major survey was conducted by Constellation Wines Inc., which holds a 20 percent share of the U.S. market. Constellation surveyed premium wine customers via the Internet, and 3,500 replied, answering more than 100 questions about their wine consumption as well as about the attitudes and lifestyle factors that affect their wine purchases. Constellation concluded that these customers fall into six segments.

In this survey, Enthusiasts (12%), are defined as passionate about the entire wine experience. Image Seekers (20%), need to feel sophisticated and trendy and will go for the more expensive bottle if not sure. Savvy Shoppers (15%), are alert to sales and look for a great wine and a great value. Traditionalists (16%), buy the tried-and-true, preferring wines from a well-known winery that has existed for a long time. Satisfied Sippers (14%), want a sensible choice they can feel comfortable serving to family and friends. They are happy with the wine they have always bought and tend to order the house white zinfandel in restaurants. Overwhelmed, 23 percent of survey respondents report being confused by the variety and seek help from good shelf descriptions and/or retail and wait staff.

A 2003 study by Scarborough Research looked at the demographic characteristics of wine buyers from the top 50 markets. In these markets, 43 percent of American adults 21-years-old and older recently had purchased a bottle of wine, compared to 39 percent of the adult population in general. Among those studied, the wine purchas-ers were 34 percent more likely than the average consumer to have a household income of $75,000 or more and 28 percent more likely than average to have a college degree or higher educational attainment. Nearly 75 percent of the wine purchasers owned their own homes. Ten percent of the consumers were African American, and ten percent were Hispanic. Forty percent of the wine purchasers had attended a professional sports event during the previous year, while 13 percent had attended a symphony concert or opera. Among these wine buyers, 55 percent had purchased a bottle of red wine in the preceding three months, 49 percent a bottle of white, 25 percent a blush or rosé, and 19 percent champagne.

ADJACENT MARKETS

The dollar value of beer sold in the United States is higher than is the value of wine, but wine is catching up. A study conducted for the Wine Market Council found that tradeoff drinkers—those who have switched from beer to wine as their preferred alcoholic beverage—make up 14 percent of the total number of wine drinkers.

These trade-off drinkers tend to be young. The study showed that 62 percent are millennials or gen-Xers, while 30 percent are baby boomers, and that 54 percent of tradeoff drinkers prefer red wine compared to 40 percent of other wine drinkers.

U.S. Census Bureau statistics illustrate the growing market share enjoyed by wine. In 1992, breweries shipped $17.34 billion worth of beer, while wineries shipped only $4.3 billion, less than a quarter as much. By 2002 beer had increased to just $17.86 billion while wine had more than doubled to $9.4 billion. In 2005 the figure for beer was $20.79 billion, while wine reached $10.45 billion, more than half as much.

Similarly, the Statistical Abstract of the United States: 2007 shows that while per-capita beer consumption declined, wine consumption increased slightly, although it is still considerably smaller in volume than is beer. In 1990 the average American drank 23.9 gallons of beer and 2.0 gallons of wine. In 2004 beer consumption had dropped to 21.6 gallons per capita, and wine consumption had increased to 2.3 gallons per capita.

Over the same period, the market for distilled liquors gained steadily in terms of dollars. Shipments totaled $3.39 billion in 1992, $4.06 billion in 2002, and $5.38 in 2005. Per capita consumption of distilled liquors dropped from 1.5 gallons in 1990 to 1.3 gallons in 2000 and then rose to 1.4 gallons in 2004.

One market that has benefited from the increasing popularity of wine is wine accessories. While retail sales of items such as wine charms, high-end corkscrews, ice buckets, and thermometers to confirm that the wine is the correct temperature for drinking have not reached the levels common in Europe, they are growing steadily. As Americans learn more about wine and drink more expensive varieties, they purchase accessories to enhance the wine-drinking experience.

RESEARCH & DEVELOPMENT

In its economic impact report for the Wine Institute and CAWG, MKF Research noted that less than $15 million was spent in California for wine industry research and education in 2006. While much of the research was funneled through the University of California, the wine industry itself contributed $10.8 million of the money spent on viticulture (grape growing) and enology (winemaking) research.

As an illustration of the perceived importance of such expenditures, Australia announced in 2005 that it was increasing the levy the industry pays for research and development from $A3 (Australian dollars) per ton of wine grapes crushed to $A5. The government noted that shipments were up, but said the level of research and development must increase for long-term improvement of Australia's wine and its competitiveness in the global market. While land-grant universities in other grape-growing states conduct research on viticulture and enology, much of the wine-related research in the United States is centered at the University of California, Davis, particularly in the Kearney Agricultural Center.

Research programs at the Kearney Center include the use of growth regulators and other means to improve the yield of wine grapes; development of sustainable weed-control practices; pest management, particularly through natural, cultural, biological, and selective pesticide techniques; and vineyard irrigation management.

The University of California, Davis expects to open the $85 million Robert Mondavi Institute for Wine and Food Science in 2008. The institute houses the University of California, Davis departments of viticulture and enology and food science and technology. Ground was broken in 2005 for the first building of the institute, a 129,000-square-foot building. Its three wings wrap around a courtyard that faces westward toward a teaching vineyard and open space. A teaching and research winery and a brewing and food science laboratory are branches of the complex. The institute is being financed by a number of gifts including $25 million from Robert Mondavi and $33.6 million in state funds approved by voters as part of a statewide bond measure.

The American Society of Enology and Viticulture, with its headquarters in Davis, California, was founded in 1950, originally with members coming from the University of California and California winemakers. The Society now has 2,400 members, 100 industrial affiliates, and three chapters in addition to Davis—the eastern, Pacific Northwest, and Japanese chapters. The Society publishes the American Journal of Enology and Viticulture, a quarterly that is offered online and in print, as well as symposia proceedings and other publications. The society also sponsors an annual meeting with technical sessions and research forums, the Unified Wine & Grape Symposium, co-hosted with CAWG, and a quarterly newsletter.

Industry groups and individual companies sponsor market research as part of their R&D efforts. CAWG and the Wine Institute offer programs designed to help member companies in these endeavors, such as the Sustainable Winegrowing Program. CAWG also offers a program on vineyards and wildlife management and leads the Pest Management Alliance, a partnership with the Department of Pesticide Regulation and the U.S. Environmental Protection Agency. This initiative promotes reduced-risk pest management, with field days, seminars, and workshops.

CURRENT TRENDS

Industry analysts believe that wine sales will continue to grow in the United States, supported by both ends of the age spectrum. It also anticipates that consumers will continue to buy more expensive wines and take advantage of new marketing made possible by the Internet to explore more brands and varieties of wine. In fact, direct sales will be responsible for an even bigger proportion of wine sales, particularly from small wineries. In addition, more small wineries will be established, encouraged by the variety of direct sales techniques. Some of the smaller ventures are taking advantage of "custom crush" facilities, which offer winemaking services that allow them to establish a winery without the capital investment typically required to crush their own grapes.

Vintners are also expected to try new products, messages, and packages to make wine less pretentious and more approachable in an effort to attract new consumers. Aggressive pricing on California wines is expected because of the record-breaking 2005 and large 2006 grape crops. White wines made from these large crops came to market in 2006 and 2007 while most red wines from these years will arrive in the market in 2008 and 2009.

The legislative interests of the Wine Institute and CAWG indicate other issues that will continue to be important. With many states operating on restricted budgets, there is widespread interest in increased taxation on wine and spirits. Many of the proposals would direct the funds toward special programs such as alcohol-abuse treatment. California imposed a number of new fees and is considering more.

The wine industry has a major interest in proposals for immigration reform, favoring guest worker and other programs that will allow it to maintain a steady supply of immigrant labor for grape cultivation and harvesting.

The Wine Institute is monitoring farm legislation, working to ensure federal funding for research, conservation, promotion, disease/pest eradication, and export assistance. Other legislation of interest involves labeling, with proposals to include information on wine labels about potential allergens and about nutrition.

TARGET MARKETS & SEGMENTATION

Given the fact that only 40 percent of Americans drink wine, the industry is looking for ways to attract new customers. Marketing organizations such as the Wine Market Council target national and major metropolitan electronic and print media, concentrating on the lifestyle, business, food, fashion, and entertainment reporters and editors. Food and wine pairings, holiday entertainment tips, and even wine-related New Year's resolutions have been offered to the media to convince those who do not drink wine that it is an important part of entertaining and gracious living.

Substantial efforts also are under way by industry groups to convince writers and reporters for wine and travel publications to write about California grape growing and wine in an effort to divert consumers away from imported wines. With demographic information showing that the large millennial group of young adults is adopting wine drinking at an earlier age than have previous generations, efforts also are being made to appeal to this group with less traditional brand names, labels, and wines. The Wine Group, for example, created an entire division to focus on the millennials. Underdog Wine Merchants, as it is called, was formed as an autonomous organization within the company. The brand portfolio includes what the company terms millennial brands such as Pinot Evil from France, Killer Juice from the Central Coast, Silver Birch from New Zealand, and Devil's Marbles from Australia.

The industry also is marketing more to the rapidly growing Hispanic population, based on research showing that only 25 percent of Hispanics over the age of 21 drink wine. Hispanics made up 14 percent of the U.S. population in 2005 but consumed only 10 percent of the wine sold in the United States that year.

Wineries, aware that more women than men choose wine as their preferred beverage and that the majority of wine purchases in the United States are made by women, are creating brand names designed to appeal to women. Beringer Blass Wine Estates, for example, launched White Lie Early Season Chardonnay, which has fewer calories and less alcohol than does a typical Chardonnay.

Constellation conducted a massive survey of 3,500 premium wine drinkers. This survey is the basis for the company's premium wine business strategy. Constellation sales and marketing staff analyze the wine lists of na-tional restaurant groups and the wine assortments of key national retailers, and then use this information to target specific wine recommendations in line with the identified needs of the premium wine market segments identified in the survey. Decisions about promotional calendars, store signage, and store assortments are also based on this market information.

RELATED ASSOCIATIONS & ORGANIZATIONS

Allied Grape Growers, http://www.alliedgrapegrowers.org

American Society for Enology and Viticulture, http://www.asev.org

California Association of Winegrape Growers, http://www.cawg.org

WineAmerica, http://www.wineamerica.org

The Wine Institute, http://www.wineinstitute.org

Wine Market Council, http://www.winemarketcouncil.com/index.asp

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see also Beer, Distilled Spirits