Description

THE US WINE INDUSTRY1

Armand Gilinsky, Jr. (Sonoma State University)

Raymond H. Lopez (Pace University)

How do firms in the US wine industry produce, compete, and distribute their

products?

Wine Production

Producing wines was capital intensive. Vines planted in a given year did not become productive on a

sustainable basis for at least four years, with optimum output reached in the seventh year. Land

upon which grapes were grown could be obtained and used in one of three ways. It might be owned

and managed by the wine producer. Alternatively, the producer might contract with landowners to

purchase their grapes annually. Finally, the landowner could allow the producing firm to plant and

manage the growth of the vines, harvesting the grapes with its own personnel and simply paying the

landowner for these privileges.

As an agricultural process, grape growing was subject to a variety of risks. Varying weather and

climactic conditions could have significant effects on grape yields per acre in any given year. Vines

were also susceptible to pests that could adversely affect any given crop. As there was only one grape

crop available per year, a combination of factors could have a significant adverse effect on grape

supply and, consequently, the volume of wine produced and available for sale.

Harvesting equipment, along with crushers and fermenting tanks, was expensive, and yet used only

one to two months per year. They had no other use and therefore were idle for up to ten months per

year. After fermentation wine was pumped into barrels for aging. These barrels cost $600 to $700

each and had a useful economic life of five years, with almost no residual value. While white wines

remained in barrels for up to a year before bottling, most red wines aged in barrels for two years or

more. Generally, the quality of the final red wine increased with length of barrel aging. Also, barrels

needed to be “topped” every one to two weeks, since some wine was lost through the pores of the

wood. Over a two-year period approximately five % of wine volume was “lost” through the

“breathing” process. Full maturation prior to sale sometimes took another two to three years. These

additional maturation cycles to create quality wines tended to greatly increase inventory investment

costs.

Table wines comprised over 80% of total wine industry sales in the United States. Grapes used for

table wine production could be of varying quality. Varietals—such as Chardonnay, Merlot, Sauvignon

Blanc, Pinot Noir, and Zinfandel—were delicate grapes from vines that typically took at least four

years to mature.

Regulatory Environment

The US Alcohol and Tobacco Tax and Trade Bureau (TTB), prior to January 2003 had been a

division of the Bureau of Alcohol, Tobacco and Firearms (BATF). The TTB was overseen by the US

Treasury and regulated all alcoholic beverage sales in the United States. The TTB’s truth-in-labeling

standards stated that one variety or varietal—the name of a single grape—could be used if not less

than 75 % of the wine was derived from grapes of that variety, the entire 75 % of which was grown in

the labeled appellation of origin. Appellation denoted that “at least 75 % of a wine value was derived

from fruit or agricultural products and grown in place or region indicated.”

In addition to federal regulations and excise taxes, a myriad of state laws and regulations restricted

the sale of alcoholic beverages. These laws in most states required wineries to sell via a “three-tier”

distribution system (winery to distributor to retailer to consumer). Distributor consolidation

increased substantially after the May 16, 2005, Granholm v. Heald United States Supreme Court

decision that prohibited discrimination between in-state products and products from out-of-state.

This decision subsequently served to increase liberalization of shipping wine across some state lines,

direct from producers to consumers.2