State’s wine exporters find success, despite an intensively competitive market.
Unless relieved by rain this fall and winter, California will enter the fifth year of a historic drought in January.
The drought has had a devastating effect on much of the state’s agriculture, but a trade association for California’s wine industry was still optimistic about this year’s harvest.
The Wine Institute said in October that “2015 delivered California vintners and growers across the state another stellar vintage. Despite a lighter crop—compared to last year—from one of the earliest seasons on record, wildfires during harvest in some regions and a fourth year of drought, quality is high across the board.”
Linsey Gallagher, director of international marketing at the Wine Institute, said the quantity of this year’s vintage will be about 30 percent lower, but added “that’s actually not a bad thing.”
“We had three record back-to-back vintages in 2012, 2013 and 2014, both for quantity and quality,” she said, and California wineries are “long on inventory. So to have a more average-sized vintage in 2015 is not a problem. We certainly won’t run out of stock in export markets, but it also may bring supply and demand back into little more of an equilibrium.”
Gallagher said California is the fourth largest producer of wine in the world behind France, Italy and Spain, and usually exports about 20 percent of its output.
Wines Vines Analytics noted California is by far the country’s largest wine producer. As of July, the state had 3,962 wineries or 47 percent of those in the United States. California makes an even greater share of the nation’s wine: 315 million cases or 88 percent of the nation’s total production of 356.4 million cases.
While most California wine is destined for sale in the United States, the Wine Institute said at least 90 percent of U.S. exports are from California.
U.S. exports amounted to 442.7 million liters, or 49.2 million cases (there are 9 liters, or a dozen 750 milliliter bottles in a standard case), which resulted in $1.49 billion in winery revenues. That was down slightly from the prior year, which the institute attributed to both the strong dollar, which makes U.S. exports more expensive than wine from some other countries, as well as the West Coast port slowdown in 2014.
“A long time ago exports might have been the solution for an inventory challenge in the domestic market. If you were long on inventory then maybe you’d look to an export market to make some sales,” Gallagher said. But “in the last 10 or so years, and maybe a little bit before that, [exports] have become a very significant area of strategic focus for all of our wineries that are active in the export space.”
California wineries produce wines that sell at a range of prices, and producers of less expensive wine contend in a fiercely competitive industry with producers of bulk wine from South America, the European Union, Australia, and South Africa.
About 30-33 percent of California wine is exported to Canada and 35 percent goes to the 28 countries of the European Union, with the United Kingdom being the largest importer of California wine. While distinguishing where that wine is consumed within the European Union is challenging, the United Kingdom, Germany, and the Benelux and Nordic countries are major markets.
Gallagher said it’s difficult for U.S. exporters to penetrate the French, Italian or Spanish markets where consumers are very loyal to their domestically produced wines.
The U.K. trade director for the Wine Institute, Johan McLaren, said earlier this year that “a series of above-inflation duty increases has taken its toll on the sales of wines at popular prices. However, consumer wine drinking behavior is changing to a less-is-better approach, and premium wines priced at $15 and over have increased by 30 percent. Premium California wine is set for further growth here.”
Other leading markets for California wine include Japan, China, Mexico and some South America and Caribbean countries. Nigeria is a good size market, a reflection of its oil wealth.
Trans-Pacific Partnership. The Wine Institute has said the proposed Trans-Pacific Partnership (TPP) would likely result in wine import duties being minimized and help sales of California wine in Japan.
The U.S. Department of Agriculture’s Foreign Agricultural Service said last year the United States exported $579 million of wine, $359 million of beer, and $539 million of distilled spirits to the TPP region, out of a total $1.4 billion of wine, $538 million of beer, and $1.5 billion of distilled spirits worldwide.
“Without the TPP agreement, U.S. alcoholic beverage exports to the TPP region face a competitive disadvantage. Australian and Chilean wine exports already receive preferential tariff treatment due to the trade agreements those countries have with Japan. Similarly, wine exports from Australia, New Zealand, and the ASEAN countries receive preferential tariff treatment from Vietnam due to the ASEAN-Australia-New Zealand Free Trade Agreement,” the USDA agency said.
“When the European Union completes its trade negotiations with Japan, Malaysia, and Vietnam, its alcoholic beverage exports will likely also face lower tariffs than the United States currently faces. If the United States does not ratify the TPP agreement, other TPP members such as Canada may ratify a similar agreement without us. The TPP agreement is necessary for U.S. alcoholic beverage exports to remain competitive,” it added.
“There is a lot of hope for China because of the sheer population numbers, but if you scratch the surface just a little bit you realize that there is a 1.3 billion population number, but only about 25 million who can afford a bottle of imported wine,” Gallagher said. “The long-term hope is that China will turn into a wine-consuming nation, more so than it is now, and that there will be a food and wine culture in China and that California wines could perhaps be the wine of choice with this younger, emerging middle class, millennial generation that exists in China and is so financially powerful.”
Oakland Outbound. Most wine exported from California is sold ex-cellar or ex-warehouse, with the overseas buyer arranging transportation to the port—and nearly all California wine is shipped through the Port of Oakland—and then to the overseas destination.
Of the 16,686 TEUs of wine exported from the United States last year, 12,480 TEUs, or 75 percent, was shipped through Oakland. And that is in a year when some exporters used alternative routings because of congestion at West Coast ports during the fractious negotiations for a new contract between the International Longshore and Warehouse Union and its employers.
“For the distributors internationally there’s such an investment that is being made and such a long lead time, they have to plan for that. If there is an interruption in shipping, it has a significant impact on their supplies. So in order to keep availability in stock in market we had to look at other ports as alternative options,” said Maureen Spring, director of sales and marketing operations at Constellation Brands, one of the nation’s largest wine, beer, and spirits companies.
Andrew Gilbertson, director of operations for JF Hillebrand USA, a major wine logistics company, said while it is not as bad as it was at its peak, shippers are still having to deal with congestion at the Port of Oakland and reduced windows in how early they can bring shipments to the port.
“A few years ago you could deliver cargo as much as a week before the vessel cutoff. But now it’s far reduced,” he said.
While terminal operators are proposing to accept cargo on Saturdays, Gilbertson feels it would be better if they had extended hours, adding because many companies are not open on weekends, they would have to “pre-pull” export shipments and then pay for overnight storage.
Even large wine exporters generally rely on the overseas importer to arrange transportation.
“I would say it is pretty much universal for the wine industry all over the world,” Gilbertson said.
A major exception is E&J Gallo, whose G3 Enterprises affiliate specializes in logistics for the beverage and fancy food companies including Gallo and third parties. It declined a request for an interview for this story.
Several shippers’ associations and freight forwarders specialize in the movement of wine, beer and other beverages. These include the Wine and Spirits Shippers Association (WSSA), which is affiliated with Albatrans, and the North American Shippers Association, which is affiliated with JF Hillebrand.
Assisting overseas buyers of U.S. wine exports is a “rapidly growing part of our market and we’re very happy about that,” said Alison Leavitt, managing director of WSSA. (Leavitt is also a member of the American Shipper Editorial Board.)
While 75 percent of WSSA’s business is with importers, the association has “39 service contracts and in the majority of those service contracts we have both eastbound and westbound or northbound and southbound rates, depending on what area of the world we’re talking about,” she said.
Overseas buyers can get access to those rates by either being members of the association or working through a forwarder such as Albatrans.
“We’ve got rates in the contracts and expertise in shipping wine and spirits, building consolidations, understanding insulation, understanding ISO tanks, flexitanks, that type of thing,” Leavitt said. (Flexitanks are polymer bags that fit inside a 20-foot container and can hold 24,000 liters of wine.)
Wine exports can be considerably more complex than domestic sales, Spring said, “especially if they are smaller customers and they are doing consolidation.”
Constellation has more than a dozen California wineries and its brands include Robert Mondavi, Ravenswood, and Cook’s Champagne. Domestically, it also produces wine in Washington and New York, and internationally it has wineries in Canada, Italy and New Zealand.
Constellation’s sales representatives present the company’s portfolio to customers in other countries. They work with them to determine the best way to sell to a market.
“They have product that is available in each of the price segments and from each of the important wine-producing areas of the world,” Spring said. “They are able to offer highly competitive ranges of product from California at different price points to meet the consumer.”
In some countries Constellation may work with a single importer, while in others it has several importers representing different Constellation brands. The company in some markets sells directly to large retailers, and in others it works with distributors.
Wine is regulated very differently across countries, and Spring said documentation and requirements for bottle and case markings vary from country to country.
In some cases special labels may have to be applied to bottles or the wine will have to undergo testing. Some customers may require a sample bottle of each vintage or shipment so that the wine can be tested by a third party lab.
At a 585,000-square-foot warehouse in Lodi, Constellation stores over 3 million cases of wine from its wineries around the state.
As orders are received, shipments are picked and staged, then loaded into containers.
Most wine is shipped in dry containers, though temperature-controlled containers do exist and may be used for higher value product.
Some shippers move product in insulated containers and Hillebrand has its own insulation kit for these shipments, which it calls VinLiner. A shipper that does not want to use a VinLiner may still give instructions about how it wants its wine to be loaded, placing the valuable wine at the bottom of a container.
Shippers may ask WSSA to request a carrier to stow their containers of wine below deck, but Leavitt said it’s hard to guarantee this will be done.
“They are stowing the containers in a highly computerized process—they are managing what might be six steamship lines on one vessel. They are looking at weights; they’re looking at hazardous cargo; they’re looking at flexitanks; they’re looking at every factor in terms of loading that vessel; and they are not going to guarantee below-deck stowage for your particular container, if it is not a viable place for that container to be,” she explained.
Both Hillebrand and WSSA offer insurance to wine shippers, but not all companies buy it, and standard polices may require a temperature-controlled unit be used to have any recourse on temperature-related damage, Leavitt said.
Bulk Wine. A large amount of wine moves by bulk in so-called flexitanks. (Flexitanks are the preferred way to handle wine, but ISO tank containers are commonly used to move distilled spirits because of their higher alcohol content.)
Hillebrand acquired the preeminent manufacturer of flexitanks, TransOcean Bulk Logistics Solution, in 2007.
According to the USDA’s Foreign Agricultural Service the share of U.S. wine exported in bulk climbed from 16 percent in 2003 to 44 percent in 2013.
The bulk wine trade has been studied by Jim Lapsley, a historian and researcher at the Agricultural Issues Center, and one of his doctoral students, Georgi Gabrielyan.
Gabrielyan said in 2014 bulk wine imports were 27 percent of the total table wine imports, and bulk wine exports were 47 percent of the total table wine exports. (Table wine is defined as non-sparkling, with an alcohol content of less than 14 percent.)
Moving wine in bulk can be much more economical than transporting it in bottles, because so much more wine can be placed in the same size container. While a flexitank in a 20-foot container can carry 24,000 liters of wine, a 20-foot container typically has 1,100 cases of wine, each holding a dozen 750 milliliter bottles, or about 9,900 liters. Because of their weight, flexitanks are usually transported on special chassis.
“People figured out that for inexpensive brands, it’s much more economical to ship bulk wine and bottled wines in the EC especially,” said Jon Fredrickson, president of Gomberg, Fredrikson & Associates, a beverage consulting firm based in Woodside, Calif. “It’s also being done in other major markets, like Japan and China.”
Spring said shipping in bulk can also improve quality and shelf lines of some wine, and Gabrielyan noted another reason for the growth in bulk exports is that the quality of inexpensive wine has improved so much.
Oliver Colvin, chief operating officer at the Winery Exchange in Novato, Calif., said there are companies that have become expert at bottling wine that arrives in bulk such as Kingsland and Greencroft Bottling, both in the United Kingdom.
Winery Exchange exports wine that is sold under its own brands and produces exclusive label wines for retailers.
Harpers, which covers the wine and spirits trade in the United Kingdom, said about 40 percent of the wine sold in that country arrives in bulk and is bottled there, and that number could rise to 60 percent.
While accidents can happen, flexitanks have improved in quality and leaks are rare and, if so, rarely catastrophic.
Gilbertson said the containers have to be carefully inspected to make sure there are no wood splinters, sharp metal edges or nails that could puncture a tank.
Drawback Advantage. Both Lapsley and Gabrielyan said one reason why bulk exports from the United States have boomed since 2003 is a change to drawback law.
Drawbacks, Lapsley noted, have a long history—they are mentioned in Adam Smith’s Wealth of Nations and the Second Congress of the United States allowed a 99 percent drawback on duties on merchandise imported into the country, if it was exported within a year.
An importer of bottled wine pays an import duty of 6.3 cents per liter, while the duty on bulk wine from most countries is 14 percent. However, bulk wine duties have been cut to zero for two of the largest bulk wine producers, Chile and Australia, because of free trade agreements. Importers of wine sold in the United States, as well as all domestic wine producers, must also pay a 28.27 cents-per-liter excise tax.
Drawback allows a company that re-exports wine to have 99 percent of its duties and excise taxes refunded.
Bulk wine sells on the international market for about $1 a liter, whether it’s produced overseas or the United States, so while nothing to sneeze at for exporters of bottled wine draw back is much more important for companies in the bulk wine trade. The import duty and excise tax can amount to about 38 percent of the average import unit value for bulk wine from countries with most-favored-nation status, (less for bulk wine from Australia and Chile) and 6 percent for bottled wine.
In 2003, the drawback rule for wine was changed to make it easier for wine companies to take advantage of it and bulk wine exports more than tripled, from 50 million liters to 150-200 million liters in recent years.
Under the 2003 changes, companies no longer have to export the exact same wine they imported to take advantage of drawback.
For example, if a company imported 24,000 liters of Sauvignon Blanc from New Zealand and exported 24,000 liters of Chardonnay from California, it would still be able to get a refund on the excise tax and import duty they paid for the New Zealand wine.
The only requirements for the imported and exported wines to be interchangeable and eligible for drawback are that they must be the same color (white or red), not sparkling or have an alcohol content of more than 14 percent, and the variation in the price between the imported and exported wine may not exceed 50 percent.
Furthermore, the importer now has up to three years to claim the drawback.
Many large wine companies both import and export wine so they can use the drawback rules for their own products. Importers can also reduce their tariff against the exports of a different company, and there are companies that specialize in drawback matching, Gabrielyan said.
“In the case where imports are greater than exports, this acts as an export subsidy—you export more, you get this refund,” he explained. “In the case where exports are greater than imports, it acts as an import subsidy.”
Shipping Outlook. For the shipping industry the future of the wine trade is bright, though the outlook for California wine exports is a little more clouded.
The United States is the world’s largest wine market, said Rob McMillan, executive vice president of the wine division at the Silicon Valley Bank, even though on a per-capita basis America is a fairly modest consuming country in terms of industrialized economies. “So everybody is of the belief there is still a tremendous amount of upside, doubling, tripling and even quadrupling of consuming patterns here in the U.S. over a long period of time.
“So, of course, we have a target on our back,” he added. “On the export side, you think about it, if you are a producing country like us, and you’re the dominant consuming country at the same time, and you have a high barrier because your currency is strong, export becomes more difficult.”
McMillan works with a number of clients in the fine wine segment, which on average export less than 3 percent of their production. The expenses involved in developing an international presence can be substantial, he noted, and “if you want to be a worldwide brand you have to have a certain amount of wine that you make. And you get to a certain point and that wine starts to become more homogenous and not as unique.”
“We’ve always imported significantly more bottled wine than we export, and I don’t see that changing,” Lapsley said. “I personally think that consumption of wine is going to continue to increase in the U.S., and I don’t see the production of wine in California increasing very much.”
He forecasts the U.S. consumption of wine could grow 50 percent by 2040.
Opportunities for California to meet that demand is limited—Lapsley does not believe production will grow in many of the major wine-producing regions of the state: in the North Coast region, including areas such as Napa and Sonoma counties, there is little land available for new vineyards, and what is available is expensive; in the Central and Southern Coast there is land that could be used to grow wine grapes, but strawberries and leaf crops such as lettuce are very profitable; and in the San Joaquin Valley, south of Fresno, farmers are grubbing out wine vines and planting more profitable crops such as almonds, pistachios and walnuts. One area that may see increased production is Lodi and Woodbridge in the delta.
“Imports are huge, but it is not as if exports are slowing down,” Gabrielyan said.
This feature article was published in the December 2015 issue of American Shipper.
