Why Are So Many Wine Regions Dealing With Oversupply?

Why Are So Many Wine Regions Dealing With Oversupply?

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On top of that, Bordeaux received 57 million euros ($60 million) to remove 9,500 hectares (23,475 acres) of vines in the region, offering to pay growers 6,000 euros ($6,310) per uprooted hectare (2.47 acres).

Along with that came the announcement out of Washington State in August that Chateau Ste. Michelle would purchase 40 percent less fruit over the next five years. Coupled with Australia’s ongoing export issues, it seems every part of the world is struggling with oversupply.

What’s leading to this global wine glut and can the wine industry course-correct?

Issues of supply and demand plague many industries, and being an agricultural product, wine has historically been particularly susceptible to such fluctuations. In 1996, Turrentine Brokerage, a grape and bulk wine brokerage firm, first published its Wine Business Wheel of Fortune, a tool that examines supply cycles and what it means for wineries and consumers. Regularly updated, it provides case studies from the last 40 years, looking at two forces driving a wine business cycle: consumer behavior and the agricultural nature of vines. Oversupply is not a new problem; the industry has always been able to readjust. But given today’s factors, it might not be so easy.
Behavioral Changes
Many of the behavioral changes toward alcohol in the past were triggered by an incident: market crashes, the tech boom, new tax laws, and other more concrete moments that influenced what people drank, how much they spent, and how they prioritized wine.

“In 1950, consumption was 150 liters per year per person. In 2022, it was 40 liters per year.”
But today, the changes feel more like a vibe shift than reactionary. Dry January birthed Sober October. White Claw and seltzers — touting low ABVs and low-calorie counts — became the drinks du jour. The “sober-curious” movement took the stigma out of not drinking. Any cocktail bar worth its flavored salt rim now offers a robust selection of non-alcoholic creations — with prices to match those of their alcoholic brethren. According to IWSR, a drinks market analysis firm, wine consumption has been on the decline since 2017.

Climate change endangers 70 percent of world’s wine regions: Study

Christophe Chateau, director of communications for the Conseil Interprofessionnel du Vin de Bordeaux (CIVB), believes consumer behavior is absolutely driving oversupply.

The French market remains the most important for French wine, but drinking is on the decline. “In 1950, consumption was 150 liters per year per person,” Chateau says. “In 2022, it was 40 liters per year.” Long gone is the glass (or glasses) of wine with both lunch and dinner.

Chateau cites globalization and broader communication channels as affecting the way French drink. “People are traveling, they are listening to the same music, watching the same videos,” he says. As a result, people are exposed to other beverage options, such as beer and cocktails, which usurp wine at the table.

Cuisine is changing, too, altering drinking habits. Instead of multi-course meals, trends favor lighter plates, or simple finger foods. Red meat is less en vogue. This equates to a rising interest in lighter, lower-alcohol wines, and for Bordeaux, specifically, a decreased interest in the region’s full-bodied reds.

For anyone paying attention to the state of the U.S. market, this surely resonates. More options, a focus on wellness, a change in lifestyle: It’s the perfect storm. Just take a look at non-alcoholic beverages, which rose 20.6 percent in sales from 2021 to 2022, according to NielsenIQ. Not only does this speak to the rising wellness trend, but it offers yet another category for drinkers to choose from.

“The wine market is changing,” says Vicky Scharlau, executive director of the Washington Winegrowers Association, an organization that represents independent growers in Washington State. “Wine drinkers are changing. Competition is more than the wine category. The channels are shrinking.”

Ste. Michelle Vintners, which would later become Chateau Ste. Michelle, was founded in 1967 and has since grown to establish itself as one of Washington State’s most well-known wineries. It sources fruit from over 30,000 acres throughout Washington, Oregon, and California. The winery owns just 2,590 acres; the rest is contracted through private growers.

In April 2020, Ste. Michelle Wine Estates (SMWE) wrote off $292 million in wine inventory and $100 million in estimated losses due to non-cancellable grape contracts and reported a 10.9 percent revenue decline for the fiscal year 2020.

In July 2021, SMWE’s parent company, tobacco giant Altria, sold the brand for $1.2 billion to private equity firm Sycamore Partners. In the past two years, Sycamore has refocused efforts in the Pacific Northwest. SMWE purchased A to Z Wineworks and Rex Hill in Oregon in 2022, and divested from its share in Stag’s Leap Wine Cellars in Napa, owned in partnership with the Antinori family.

“By making these moves we are investing in the long-term health and vitality of both our business and the business of Washington wine.”
New initiatives, such as a partnership with entertainment company Live Nation, announced in March 2023, made Chateau Ste. Michelle the company’s official national wine sponsor.

Despite the efforts to recalibrate and reach new audiences, SMWE advised growers that it would be cutting purchases by 40 percent. “As we have an oversupply of grapes, these steps are necessary to bring the business into balance,” the company said in a statement. “By making these moves we are investing in the long-term health and vitality of both our business and the business of Washington wine.”

Drinking Less, but Better
Chateau Ste. Michelle’s issue of oversupply is indicative of another trend: People are drinking less, but better. “Chateau Ste. Michelle had, for decades, been able to punch above its value and deliver well-made premium wine under $12 per bottle,” says Rob McMillan, executive vice president and founder of Silicon Valley Bank, Wine Division. “Over the past seven years, the wine industry as a whole began to see growth rates sag in the under-$12 category. That was the category Chateau Ste. Michelle focused on.”

Indeed, wines in higher-priced tiers continue to see growth in the U.S. According to IWSR, total sales in 2022 for wine by volume declined by 2 percent but rose by 6 percent in the premium categories.

The sales decline of less expensive bottles in the U.S. has far-reaching repercussions — all the way Down Under.

For almost two decades, Australia’s wine market has remained rather stable. “Over the past 16 years, total wine sales have exceeded production in the same year more times than the reverse,” says Peter Bailey, manager, Market Insights, Wine Australia.

“This is the first time since the mid-1990s that we’ve seen an oversupply based on a lack of consumer demand.”
But a main driver of the decline in value was exports to the U.S., according to Wine Australia’s Market Bulletin in July 2023. “The U.S. is experiencing a structural decline in lower price segments, which is where Australian wine is predominantly sold in this market,” according to the release.

Bordeaux shares a similar story. “[Bordeaux] has a crisis on entry-quality wine, but the business is doing very well for expensive wine because people are drinking less wine, but better quality,” says Chateau from the CIVB. He also notes Champagne and Burgundy remain impermeable to the oversupply/low demand issues of other regions.

The Effect of Global Incidents
Of course, we can’t completely dismiss major incidents as not having an effect on current oversupply issues. To compound Australia’s woes, for example, in March 2021, China imposed a 218 percent tariff on Australian wine in response to a call in April 2020 by Australia’s then-prime minister Scott Morrison to independently investigate the origins of Covid-19. As one of Australia’s most important markets, China’s decision wreaked havoc on Australia’s industry. Rabobank reported that, as of 2023, the amount of excess wine equated to 859 Olympic-size swimming pools.

What about the pandemic? Today, we’re still feeling the reverberations, from supply chain issues to how people purchase and consume wine. However, signs point to a return to “normalcy;” according to IWSR’s Key Trends for 2023 Report, and the U.S. has seen a resurgence in wine drinkers — still lower than in 2015, but higher than in 2021 — largely due to the reopening of bars and restaurants. Long-term ramifications remain to be seen.

“The short version of all this is that this is the first time since the mid-1990s that we’ve seen an oversupply based on a lack of consumer demand,” said Greg Livengood, CEO of Ciatti Global Wine & Grape Brokers, in a recent Meininger’s article.

The Business of Agriculture and Climactic Factors
Now, layer onto all of this the business of grape growing. Good vintages; bad vintages. High yields; low yields. These also push the supply and demand levers.

As we all know, when it comes to jumping on a trend, vines can’t turn on a dime. It takes several years to replant and for vines to become viable (and generate income). At this point, a trend might have crested. It’s understandable that growers would be reticent to make another change to the vineyard.

“I’ll say that it’s a problem of not enough consumption. Production has decreased, but consumption has decreased faster.”
Can nature, in its unpredictable way, help correct some of this oversupply? Twenty years ago, Bordeaux produced 6 million hectoliters of wine. For the past five years, due to hailstorms, frost, and dryness, the average is closer to 4 million hectoliters. But even with declining yields due to a changing climate, Chateau doesn’t believe so; it’s still essentially a change in consumer behavior. “This isn’t a problem of overproduction,” Chateau says. “I’ll say that it’s a problem of not enough consumption. Production has decreased, but consumption has decreased faster.”

What Can Be Done?
Bordeaux’s vine removal scheme focuses on sites in the broader Bordeaux appellation, especially in the Médoc (Margaux AOC and other sources of prestigious wines will remain untouched as demand is high for luxury wines). Merlot, which isn’t adapting to the changing climate, is a target for removal.

Chateau from the CIVB says producers who remove vines will receive 6,000 euros ($6,310) per hectare. But Bordeaux sees this moment as an opportunity to further sustainability efforts in the region. If a grower plants trees in the fallow land — to encourage carbon sequestration — they will receive an additional 2,000 euros ($2,103) per hectare. To ensure the longevity of the project, growers receive the money upfront, but they need to maintain the trees for 30 years; removing them results in a penalty.

Some grape farmers are also looking at planting other crops such as corn and wheat if the soils seem conducive, or bringing cows onto the land. Chateau notes that growers already have agricultural permits, which makes new plantings easier.

In Washington State, the Washington Winegrowers Association will work with growers to remove 10,000 acres of vines, looking first at poorly performing or diseased sites.

Bailey says Wine Australia intends to focus on market expansion and provide wineries with market data so they can determine their best course of action. “We believe that ultimately, introducing and establishing Australia’s world-class wine into new markets will help redress the imbalance between supply and demand over the long run,” Bailey says.