Coming Out of the Dark

With clean stacks of bins and picking shears at the ready, Wines & Vines polled vineyard and winery suppliers at the start of harvest 2014 to assess the health of the wine industry. As providers of financing, equipment and services, wine industry suppliers have unique knowledge about how much wine is awaiting bottling, its intended market and what plans their winery and vineyard clients have for the future.

This is the seventh year the magazine has conducted the supplier survey, which we rolled out on the brink of the Great Recession in 2008 and continue now that the economy has arrived firmly on the other side.

Steve Herron, senior vice president and commercial banking manager at Exchange Bank, said, “During the downturn, ’09 through ’11, there was a shakeout, particularly among smaller, higher end producers and mid-priced producers.

“A lot of people sold the business, probably to somebody larger, because that downturn—when distribution sales dropped by about 30% in 2009—that hurt virtually all wineries.”

Herron added that the wineries still operating post-shakeout are survivors, some of whom attracted outside equity to stay afloat during the downturn. (See “Will 500 West Coast Wineries Sell?”)

The past year Nearly 150 wine industry suppliers completed our 2014 survey, with respondents including purveyors of nursery stock, wine packaging, fermentation vessels, loan financing, compliance services and more.

This year a record number of suppliers said the wine industry had experienced rapid growth during the 12 months leading up to the survey. A full 30% of vineyard and winery products and service providers reported observing rapid expansion in the industry—a 14% jump in two years. An additional 52% of respondents reported slow growth among their winery and vineyard clients.

HIGHLIGHTS

- A record number of respondents reported wine industry growth in our seventh survey of vineyard and winery suppliers.

- Grape and wine producers' ability to obtain financing has rebounded from the Great Recession.

- More than half of suppliers plan to raise their prices during the next 12 months.

Marisa Peltier of Peltier Glassworks said slow growth has become the standard in California’s Central Coast region of Paso Robles. “There are new wineries popping up every year, but it’s not an outrageous number,” Peltier said. “It’s growing at a healthy, steady pace.”

She told Wines & Vines she’s seen an increase in the number of clients coming to get large-format bottles screenprinted, which she described as a more economical solution than having them etched.

Shelby White of capsule supplier Maverick Enterprises agrees that the North American wine industry is continuing its slow expansion, with three consecutive large harvests in California pushing production to new heights.

“Wineries that started small are getting larger because the harvest has been so great,” White said. According to the USDA’s California Grape Crush Report, state vineyards produced a record 4 million tons of wine grapes in 2012 and 4.2 million tons in 2013.

The uptick in production has had a noticeable effect on custom-crush operations, she added, as many wineries call in reinforcements to handle the unexpected surplus of wine grapes.

In the Pacific Northwest, Ken Linde, owner of Linde Vineyard Supply in Monmouth, Ore., said the recent spate of real estate transactions in Washington and Oregon has been good for business. (See “What’s Behind the Northwest Land Grab?” on page 95.)

Linde’s 10-year-old business specializes in vineyard trellising, which has been booming since 2013, when Kendall-Jackson bought three vineyards that had been contracting fruit to numerous Northwest wineries, leaving dozens of producers with holes in their wine programs. New vineyards are going in to replace the fruit lost to K-J, and the Washington market continues to expand.

“Last year was my biggest year ever, and we’re on track to beat that again this year,” Linde said.

Randy Reicharge, president of GW Kent, said his company has opened a number of new winery accounts since harvest 2013, but business is not keeping up with the explosive growth of the craft brewery and craft cider businesses.

From his view at the Ypsilanti, Mich.-based winery and brewery equipment supplier, Reicharge said he’s seen more wineries starting to make beer. “They start out small with a little bit of beer for their tasting room,” he said of winery clients who are part of the trend (most of them in the Midwest and East Coast). “They’re like a bar almost. They have big crowds at night, and it’s a tourist attraction on the weekends.”

Obtaining financing Another area that experienced significant change since Wines & Vines launched its annual survey is the availability of financing to wineries and vineyards. In 2010 just 16% of suppliers said their clients’ ability to find cash or financing was improving. This year that figure jumped to nearly 60%.

Herron of Exchange Bank, a Santa Rosa, Calif.-based outfit that caters to many wineries producing between 1,000 and 10,000 cases, said current financing is competitive for borrowers and “more available than it has been in a long time.”

In response, “Wineries are much more eager to spend,” he said, adding that the bank has been seeing a lot of loan activity in the custom-crush sector as well as replanting and vineyard acquisition.

“One thing we haven’t seen is the number of winery facilities growing,” Herron said. “I think that is a function of a lot of wineries that built more than they needed before the downturn and regretted it.”

While long-term interest rates are rising, short-term rates (typically lines of credit) have not followed suit. Herron said he expects this to change in early 2015. “If the industry remains strong, and demand is strong for consumers,” then rates are going to be less of an issue for winery operators, he said.

Equipment financing rates are very competitive, Herron stated, while inventory financing remains more challenging, especially for smaller producers.

Raising prices Another first from this year’s survey was the number of suppliers planning to raise their prices. When Wines & Vines asked the wine industry suppliers in 2009 whether they planned to raise prices during the next year, 23% of respondents answered affirmatively. This year that number jumped to 54%, with nearly 25% saying they plan to raise prices by more than 3%.

Some wine industry suppliers said expiring tax incentives for investments in renewable energy will force them to increase prices, while others attributed adjustments to the increased federal minimum wage and inflation.

As a vineyard trellis provider, Linde said his prices are subject to fluctuations in the price of steel, which he said is trending upward. “That has affected the cost per acre for a vineyard,” Linde said. “Steel is probably the biggest component, and my commodities have trended up 3% to 5% in the past 12-18 months.”

Reicharge of GW Kent said he imports most of the company’s tanks from Europe, and the euro is getting weaker. “The shipping costs are going up all the time, but the weaker euro should balance it out,” he said.

Other suppliers pointed out that wineries and wine retailers are also starting to raise prices once again.

Mike Lynch, founding partner of wine industry marketing and public relations firm Big Bang Wine, said some of the wineries that lowered prices during the recession now are trying to resume those original values.

Assessment of clients In fact, Lynch said many of his clients are the most profitable they’ve ever been. “Over the previous few years winery strategy was to cut costs to ensure profitability,” he said. “I think most (wineries) have improved financially over the past year due to cost-cutting measures and increased sales.”

Nearly 58% of survey respondents said they think their wine industry clients’ financial health is improving, while just 3% said it was getting worse.

Herron of Exchange Bank said, “You’ve got two big harvests (from California) that are being released right now, and the prices are going up, so everybody is healthy.”

Several providers of stainless steel tanks and other fermentation vessels remarked that back-to-back large harvests had prompted an increase in orders, with new winery projects and expansion among existing wineries fueling their businesses.

A supplier of winery gaskets claimed their sales had doubled during the past year; meanwhile, a provider of solar energy solutions said wineries’ return to health prompted renewed interest in capital improvements such as large-scale solar installations.

Linde, who sells supplies to vineyards in Oregon and Washington, reports that his clients are thriving as the price of grapes has gone up. The increased number of vines going in the ground has caused a bit of a shortage, however. “Plants are hard to come by,” Linde reported. “You have to really plan ahead.”

What’s to come In spite of reports of booming growth, one corner of the wine industry is eyeing the next year with skepticism: the Midwest and eastern vineyards and wineries affected by the “polar vortex” weather phenomenon of early 2014. Frigid temperatures in January and February killed vines from Minnesota to New York’s Finger Lakes, where the federal government declared 19 counties a disaster area and some vinifera vineyards experienced 100% bud mortality.

Viticulture researchers told Wines & Vines that mild weather in December 2013 left vines ill-prepared for temperatures that dropped as low as -24ºF and in some cases persisted for hours.

The year ahead looks significantly brighter for West Coast wineries, prompting nearly 85% of respondents to say they expect wine industry growth during the coming year. As consumer demand continues to increase—the United States was named the No. 1 wine-consuming country in the world in 2010—wineries will be able to expect longer growth trends that affect grapegrowers and supporting vendors.

Lynch, the founder of San Francisco-based Big Bang Wine, said independent retailers and restaurants with sommeliers are showing increased interest in lesser known varieties such as Albariño, Tempranillo and Tannat. “We’re also seeing a lot of enthusiasm for small-production wines, limited-edition wines like proprietary blends or block bottlings,” he said.

Maverick Enterprises’ Shelby White continued, “Overall it’s a great time for the wine industry. The economy is coming back, and the wine industry is just booming.”