San Francisco Chronicle - (Sunday)
State faces crushing downturn in wine industry
Closures feared amid plummeting sales, growing competition
Megan Bell felt certain that her winery was going bankrupt.
When she released a new batch of wines in August, only three of her 19 distributors agreed to buy any. She was running $65,000 over budget on opening a tasting room in Santa Cruz. And she owed $80,000 to grape growers.
Sales in the second half of the year were the worst Bell had seen since starting her small business, Margins, eight years ago.
Bell labeled 2023 “a disaster” and said she knows she wasn’t the only winemaker feeling it: “If anybody’s not telling you that, they’re lying.”
The entire $55 billion California wine industry is, like the wine industry worldwide, experiencing an unprecedented downturn now. No sector is immune — not the luxury tier, not the big conglomerates, not the upstart natural wines. Wine consumption fell 8.7% in 2023, according to leading industry analyst the Gomberg Fredrikson Report, a sobering reversal for an industry that had, for a quartercentury, taken annual growth for granted.
This year could be the breaking point, with many industry figures predicting “a good-sized housecleaning,” as put by Ian Brand, owner of I. Brand & Family Winery in Monterey County.
“A lot of brands are dead, but they don’t even know it right now,” echoed Michael Honig, president of Honig Vineyard & Winery in Napa Valley.
An extinction-level event has not come to pass — yet. But regardless of the winery survival rate, it’s become clear in 2024 that the nature of the California wine industry has fundamentally changed. After decades of unfettered growth beginning in the 1990s, wine consumption started to flatten around 2018. Now, following what appeared to be a spike during the pandemic, it’s in
dramatic decline.
“The industry’s had the wind at our back for a long time,” said Jeff O’Neill, CEO of O’Neill Vintners and Distillers, which owns more than a dozen wineries. “And finally the music has stopped.”
No single factor is responsible for California wine’s present predicament. Millennials and Gen Zers aren’t drinking as much alcohol as older generations. Hard seltzer and canned cocktails have stolen market share. The current medical consensus suggests that alcohol is unequivocally bad for human health. (Beer and spirits sales are struggling, too.)
A new set of problems emerged with the pandemic, though wineries didn’t realize it at the time.
In 2020, with everyone stuck at home, wine sales skyrocketed. “We all thought, ‘This is fantastic, we’ve found the holy grail of selling wine, and this is just going to continue,’ ” O’Neill said. Many wineries increased production. But the demand dried up when people realized they’d bought too much and weren’t depleting it quickly enough, a phenomenon now known in the industry as “pantry loading.”
The unsold cases piled up. Meanwhile, with fewer people going out to restaurants post-COVID, wineries saw a key sales channel wane. Rising interest rates drove distributors to reduce their inventories, buying less from wineries. Because there’s a yearslong lag between the time a wine is made and the time it’s sold, it took a while before wineries could notice these effects — let alone do anything about them.
Slowly and then all at once, the simmer reached a boil.
“So far this year we’re down 10% (in sales), which is the first time in 17 years we’ve ever been down,” said Morgan Twain-Peterson, owner of Bedrock Wine Co. in Sonoma.
In her decade in business, “2023 was the first year that we didn’t grow,” said Martha Stoumen, whose eponymous winery is in Sebastopol.
“If you’re lucky, you’re down 10%. We are,” Brand said. For many California wineries, he added, a 10% drop could be “existential” if it lasts too long.
In the past, wineries had recourse when sales dipped and expenses rose: raise the bottle price. But that’s become trickier. “There’s too much competition,” said Steve Lohr, president and CEO of J. Lohr Vineyards in San Jose. “And with the overall market going down, there just isn’t room for price increases.”
Until recently, Bell believed Margins was about to become one of the wineries that just didn’t make it.
Bell, 33, is energetic and outspoken, with a wide grin that tends to morph into a laugh. When she started Margins in 2016, she was one of many bright-eyed young California winemakers realizing the dream of having their own wine label.
Although it took five years before Margins was bringing in enough income to pay Bell a full-time salary, she felt confident she was on the right track. Her wines — mostly underloved grape varieties such as Cabernet Franc and Assyrtiko — received positive press. She built a loyal wine club and got distribution in 10 states. She started farming her own vineyard. She and a friend, winemaker James Jelks of Floréz Wines, coleased their own winemaking facility, a former apple storage warehouse.
Finances were always tight. In her best year, Bell said, Margins brought in about $430,000 in revenue and just under $40,000 in profit. But in 2023, her net profit margin was merely 3%.
Knowing that opening the tasting room — a 120square-foot nook that she affectionately calls the Wine Cubby — would be costly, she took out a $95,000 loan. But the buildout would ultimately cost $134,000, not including the rent and tasting room employee salary she was paying before it opened.
Bell prided herself on her resilience in the face of hurdles like these. This was just the nature of running a small California winery, right? But when fall 2023 rolled around and nearly all of her distributors declined to buy her new wines, the panic set in.
Bell estimated that, by the end of February, she’d be $11,000 in the red. That meant going out of business.
Margins managed to survive, barely. The bank increased Bell’s loan. After a failed inspection and a year and a half of waiting, the tasting room’s permit finally came through in December. Eventually, to her parents’ chagrin, she resorted to a crowdfunding campaign. The $24,000 in donations helped her get through a couple of scary months.
On a chilly spring morning, as she drew samples of wine from portable stainless tanks in her winery, Bell reflected on the strategic changes she plans to make going forward. “I’m going to make half as much wine this year,” she said, spitting a taste of Vermentino into a bucket. She was giving these wines a final assessment before a mobile bottling line arrived, making sure they passed muster. Bell paused and smiled. The Vermentino had summoned an aromatic memory, reminding her of the smell of sunscreen by a pool in the summer.
From now on, she announced, she will no longer bottle any product that hasn’t been at least 70% presold. She’s hoping to sell a larger proportion of her volume through the Wine Cubby, an inviting space with a muted-teal backsplash and open cabinets full of decorative knickknacks. There, she gets a bigger cut of the bottle price than when she sells to restaurants or shops.
But even if she makes it through, this last year has left Bell deeply disillusioned with her trade. “The tasting room will save us, but I was barely able to cross that finish line before the gate was shutting,” Bell said. Part of the reason she’s so transparent about her struggles, she said, is because she wishes someone had given her a clearer picture of what it would be like to run a winery before she’d decided to devote her life to it.
Interviews with 16 California wineries about the present crisis revealed one popular theory: This may simply be a market in need of a correction. There are too many wineries in California, too many grapevines planted, too much wine being bottled for the market to bear. This is an industry that grew complacent, so accustomed to its baby boomer-dominant customer base and its old way of doing things that it hasn’t been forced to meaningfully innovate in a long time.
And while winery owners may feel as if the sky is falling, many industry analysts hold a more measured perspective. “This is really, I believe, an inventory adjustment,” said Gomberg Fredrikson Report editor Jon Moramarco. Once all the pantry loaders finally drink through the wines they stockpiled during lockdown, he believes they’ll start buying wine again.
But even the optimists clinging to this view don’t envision the kind of growth that was standard a decade ago. “There were some other times when we saw little hiccups in the overall growth of wine,” Lohr said, such as during the 2007-08 recession. What the industry is experiencing now, he said, “is meaningfully different.” According to Moramarco, the best-case scenario is a return to the flattening growth curve of 2018 and 2019. The boom times are over.
For young winemakers like Bell, the end of the boom times may also mean the end of a certain version of the California wine dream. Everything that drew Bell to this work in the first place — the chance to farm, the geeky grape varieties, the community of fellow winemakers — is all for naught, she said, if it becomes impossible to pay the bills.
“Things feel really sad right now,” Bell said. “I’m looking at people who are like me eight years ago and thinking, you’re never going to make it.”