According to the Gomberg, Fredrickson Report, imports of wines in bulk in the United States exploded 214 percent for the first eight months of 2006 compared to the previous year. That's an increase that jumps off the page and begs for an explanation. What is driving this growth and what does it mean for California growers, wineries and brand owners?

There are three major components of the increase in bulk imports:

• Some established imported brands have begun bottling in the U.S., probably in order to save on the cost of shipping glass. 
  
• There has been an increased use of imported wines as a blending component in American appellation wines, particularly for cask (bag-in-box) wines. 
  
• U.S. brands have been purchasing imported Pinot Noir, Pinot Grigio and White Riesling because they cannot find sufficient supply to meet rapid growth in demand.
  

The change of bottling location from Europe or Australia to the U.S. for established import brands is not important for anyone except the sellers of packaging materials. In any case, this increase in bulk imports is offset by an increase in bulk exports due to U.S. brands now bottling some of their U.S. wines in Europe.

The increase in the use of imported wines as a blending component in American appellation wines does cause concern among U.S. growers, particularly growers in California's San Joaquin Valley. U.S. law specifies that a blend must be at least 75% American in order to be identified on the label as American wine. Wines labeled as American are not allowed to use a vintage date. There are, of course, many places in the world where some of the major costs of growing grapes and making wine (land, water, labor and compliance costs, for example) are lower than in California. However, by the time you factor in freight and U.S. import tariffs (see chart below for some recent costs), any cost advantage would be relatively small. Other considerations possibly driving these imports may be the quality of the imported wines relative to cost and the expected long-term availability of these wines in order to support growing brands at competitive price points.

Approximate freight, port to port U.S. tariff & fees Approximate total added cost

• Australia $1.10 / gal $.41 / gal $1.51 / gal
• Chile $.62 / gal $.41 / gal $1.03 / gal
• Italy $1.13 / gal $.55 / gal $1.68 / gal
• France $1.02 / gal $.55 / gal $1.57 / gal
  

Concerned growers have considered various ways to compete with these low cost imports, including the possibility of petitioning for a change in labeling laws to make American appellation wines 100 percent  American. Such a move, of course, could backfire. Brands could switch at least part of their production to Australian or Argentine appellations, for example, and use no American wine in the blends at all instead of the current 75 percent minimum. This would also allow the brands using imported wines to upgrade by using a vintage date. Another possible defense is to promote the California appellation to consumers, hoping to increase demand and to justify a premium for California grapes and wines. In my opinion, the most reliable and sustainable way to enhance the California appellation is also the most difficult way; that is, to demonstrate a commitment and a record of constantly improving quality. Connie and Conrad Consumer are skeptical of self-promoting claims. They are more interested in results, especially results that are verified by third parties. The wines of Sicily, for example, have improved dramatically in the last five years and this fact, recognized by third parties such as wine writers, has piqued retailer and consumer interest far more than slogans or unverified claims.

The third category of imported wines shipped to the U.S. in bulk is those wines purchased by U.S. brands because they could not find sufficient supply of U.S. wines at the right price points for the hottest varieties, especially Pinot Noir, Pinot Grigio and White Riesling. Our company, Turrentine Brokerage, has been involved in the sales of substantial volumes of these wines over the past couple of years. The majority of our clients who have purchased these wines would have preferred to purchase California wines if they were available and in fact most clients have been willing to pay substantially higher prices for equivalent quality California wines. They prefer California wines for the following reasons:

• California wines are consistent with established brand identities. 
• It is easy to blend California wines to maximize quality and consistency.
• There is much less that can be done to blend imported wines. 
• It is easier to do business with people who speak fluent English and who are within driving distance.

These advantages result in a substantial premium for comparable quality California wines. But nevertheless sales of imported wines in bulk for these hot varieties are growing rapidly because they are available at a lower price for comparable quality. During the last 12 months, for example, we sold millions of liters of imported Pinot Noir for the equivalent of about $6.75 per gallon to $7.50 per gallon, landed, duty paid. These wines were very competitive in quality with California appellation Pinot Noir that we have sold for more than $16.00 per gallon. We have also sold Pinot Noir from Burgundy at the equivalent of about $14.50 per gallon that was comparable to Coastal Pinot Noir from California selling for $25.00 or more.

What will happen to the brands that have switched to imported wines when substantial new plantings of Pinot Noir come into bearing in California over the next two to five years? It is really impossible to know because it depends on how fast consumer demand grows during that time and how fast the California supply grows. It is highly likely that most brands will still be willing to pay a premium for California wines of equivalent quality, but the amount of the premium is likely to decrease as the worldwide supply becomes more abundant and consumers, retailers, distributors and producers all become more comfortable with the imported wines.

There are wine business executives who think the current strength of imports is just a temporary phenomenon. After all, there have been many times in the past when imports won significant gains in market share in the U.S. market because the dollar was strong or the California wine business was short of supply. But this is not one of those times. Over the last six years, conditions have been as difficult as they could be for imports: California has had a substantial excess of wine and the dollar has been weak, making imports more expensive. Nevertheless, imports have continued to take market share away from California wine. What accounts for the remarkable rise in imports against the odds? Two things: American wine consumers have become more adventuresome and many wine producing regions have improved their wines and have adapted them for U.S. tastes. Up until a few years ago, most American wine consumers were cautious, preferring to purchase wines that were familiar. California brands, with appellations, varieties and labels that are relatively easy to understand, was the safest option in the marketplace. But now Connie and Conrad are willing to gamble on Albarino from Galicia or Malbec from Argentina. They are excited to try the wines of the world and California may have become a little too "tried and true" for its own good.

The lingering over-supply situation in California was not caused primarily by imports. Rather it is mostly home grown, resulting from the huge planting boom that took place in California between 1996 and 2001. Many of these new vineyards came into production just as the dot com boom went bust, the 9/11 attacks decimated the U.S. economy, and Enron and WorldCom piled on for good measure. The rate of sales growth for wine slowed just as vineyard production took off. And then, as the wine business finally succeeded in moving most of its excess inventory - at great cost over several years - Mother Nature played an impractical joke and gave us a 2005 harvest with a million tons more than 2004. That was about a million tons more than the wine business needed. These internal factors are by far the most important in our current supply situation. But long term, competition with imports will still be intense even when the California planting boom and the 2005 avalanche of grapes are distant memories.

What can California do to respond to the challenges of an intensely competitive global marketplace? The best answer may come in the equation, reproduced below, that shows the relationship of the three components of Product Value. I don't know who invented this equation, but it summarizes a complex situation in a wonderfully simple way.

• Product Value = Product Quality + Perceived Quality ÷ Price

At every price point, Connie & Conrad Consumer expect high product value. The mechanism of global competition is remarkably good at delivering ever greater product value. As the equation shows, there are three components that affect product value. The first is Product Quality. For wine, Product Quality means the flavor and color and aromas, the deliciousness, if you will, of the liquid in the bottle. The next component is Perceived Quality, which is the brand, the appellation, the packaging, the way the product is presented and where it is sold. Product Quality and Perceived Quality are added together and are then divided by Product Cost to produce Product Value.

To improve Product Value, one must constantly work on all three components. California is such a wonderful place to grow grapes and make wine that sometimes growers and winemakers become complacent. But quality is increasing around the world. Some international winegrowing competitors have been investing in research at significantly greater levels than the U.S. wine business and it is critical that we support the National Wine and Grape Initiative to increase funding for research so that the U.S. remains competitive. We also must constantly work on building great brands and on building recognition for our various appellations, including the California appellation. Although California will never be the low cost producer of grapes and wine, California producers need to work diligently on driving down costs wherever possible. Global pressure will also convince many wine business folks to become more open-minded about vineyard and winery practices that are not so pretty to look at but which might have the potential to produce nearly the same results at a lower cost.

Global competition may serve Connie and Conrad Consumer well, but it is tough on producers. It expands opportunities for those who can figure out the right combination of product quality, perceived quality and price. But it continually intensifies the competition, giving many growers and wineries an experience somewhat like that of a confident high school basketball star who tries to make the team at UCLA, or even the college player who tries to make the NBA. Global competition has actually been slow to heat up in the wine business. Most people do not know and do not care where their brake pads are made or where the cotton in the shirt on their back was grown. But wine is a product that by its nature speaks of place. Both the trade and the consumer care, at least to some extent, about its origins, and that care increases as the price point increases. This interest in origins has buffered the impact of globalization. But a more adventurous consumer, while still interested in origins, is increasingly willing to enjoy wine from anywhere on the globe. This means that, even though the supply situation is improving in California, the pressure is on to step up the game.

Bill Turrentine is the President of Turrentine Brokerage, a company founded in 1973 that sells grapes from independent growers to wineries, wines in bulk between wineries and which also helps export California wines and to import wines from around the world.

The full text of this article appears in the January 2007 Wine Business Monthly