Findings from an extensive survey of the California wine industry conducted by the UCC Group in Napa and compiled by the Graduate School of Management at the University of California, Davis, show that the dramatic increase in premium wine sales over the past three years is attributed to two key factors -- perceived health benefits from wine and an improved economy. While the demand for California wine continues to escalate, the supply of California grapes has not kept pace, prompting higher prices per bottle and sourcing of grapes from other countries, according to Robert H. Smiley, dean of the Graduate School of Management and a wine economist. "Increased interest in chardonnay and merlot wines coupled with the slow recovery from the phylloxera outbreak (a disease affecting vine roots) in the early 1990s has made it difficult for wineries to meet consumer demands," said Smiley. Speaking today at the fifth annual Wine Industry Symposium at the Silverado Resort in Napa, Smiley said that continued grape shortages, production capacity shortages and increased foreign wine imports will cause the greatest negative impact on California wine sales during the next three years. "These negative impacts will be countered by positive conditions including a strong economy, an expanding consumer base and the perceived health benefits from red wine consumption," Smiley said. This annual wine symposium is held to develop new and creative strategies for continued success of the wine industry. The symposium brings together key members of the wine business and various financial, legal, and accounting professionals serving the industry. Survey results came from 140 wineries, 60 wine sellers and 45 grape vintners in California interviewed within the past few months. Among survey highlights are that: • More than 90 percent of the respondents believe sales and profitability increases will last nearly four years. This is a decidely more optimistic outlook than last year's survey. Of all those surveyed, wine growers are the most optimistic group. • Growers expect merlot will have the largest case increase over the next three years because of consumer preference. Wineries, distributors and retailers felt that red zinfandel would lead, followed by merlot, pinot noir, sangiovese and syrah, all red vareitals. • The largest increase in foreign wine imports and bulk wine is expected from Chile, followed by Australia, Italy and France. • More than 95 percent of the respondents expect that the growth will occur over the next three years in wines in the $7 to $10 range. The next most growth will be in the super premiums at $11 to $15 a bottle. • Chardonnay grapes dominate the number of acres planted in California with more than 34 percent. Second is cabernet sauvignon with 26 percent followed by merlot with 15 percent. • California produces about 80 percent of U.S. wine. Thirty-eight percent of all wine sold comes from Napa/Sonoma, 14 percent from coastal California and 13 percent from Central California. • Nearly 100 percent of wine grape growers made money in 1995. Ninety percent expect to be more profitable this year, and all say they should make money in 1998. • Out-of-state regulations prohibit California wine producers from selling directly to consumers in some states. • International wine producers took advantage of the trend toward varietal labeling in California in the early 1990s. Chile, Australia, Italy and France stepped up their distribution and marketing efforts, building market share for their wines. "These survey results have helped our industry think more strategically and given us valuable insights in the areas of finance and marketing," said R. Michael Mondavi, president and chief executive officer of the Robert Mondavi Winery. In addition to providing survey results, Smiley suggested ways for wine producers to extend their product life cycles. He used examples of other businesses' successes to demonstrate ways to extend the life of the product. Life-cycle extension involves finding ways to increase the frequency of use of a product, expanding the product's market and developing new uses for the product. "I want to help the wine industry continue their profitability and avoid the eventual downward curve of the product life-cycle for brands and varietals," Smiley said. The founders of the Wine Industry Financial Symposium include The CCC group of Napa; the UC Davis Graduate School of Management; Pisenti & Brinker of Santa Rosa and Napa; Price Waterhouse of San Francisco; Dickenson, Peatman & Fogarty of Napa; and Steefel, Levitt + Weiss of San Francisco. KEY FINDINGS Health Claims, Economic Upturn Fuels Wine Consumption Wine growers and vintners as well as wine sellers and distributors attribute the increase in wine sales over the past three years to two key factors: • Perceived health benefits associated with red wine consumption • The improved U.S. economy Growers, vintners, sellers and distributors are more optimistic about continued profitability this year. They expect the upswing in sales to last for 3.8 years. In last year's survey, respondents thought the upswing would last for 2.8 years. "Baby Boomers" Drive Sales Increase Baby boomers are reaching the time of life when discretionary income is at its highest level. Boomers and others have responded positively to claims of health benefits associated with red wine consumption. • Red grapes, including merlot, red zinfandel and syrah will be in short supply for the next several years. • Sales of wine by price category are predicted in the following percentages: about 51 percent in fighting varietals ($3 to $6 per bottle), 27 percent in premium ($7 to $10), 14 percent in super premium ($11 to $15), and 9 percent in ultra premium ($16 plus). • Chardonnay continues to be the top seller accounting for 30 percent of wine expected to be sold in 1996. White zinfandel follows with 21 percent, then cabernet sauvignon with 18 percent, and finally merlot with 13 percent of the market share. State and Federal Regulations Inhibit Wine Sales Although wine sales are on the upswing, the industry faces continuing challenges. Nationally • Federal restrictions set by the Bureau of Alcohol, Tobacco and Fire Arms prohibit the wine industry from making a direct link on health claims. • Out-of-state regulations prohibit California wine producers from selling directly to consumers in other states. Internationally • International wine producers took advantage of the trend toward varietal labeling in California in the early 1990s. Chile, Australia, Italy and France stepped up their distribution and marketing efforts, building market share for their wines. • The competitive pricing of foreign wines and increased marketing helped international wine producers gain a solid entry into the market. International competitors began labeling their products to reflect "California varietal labeling," thereby increasing consumer receptivity to their products.