Wineries
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Industry Overview
The US wineries industry includes about 1,000 companies with combined annual revenue of $8 billion. Large companies include E&J Gallo, Constellation Brands, and The Wine Group. Almost half of wineries are small, with fewer than five employees. The industry is highly concentrated: the 50 largest companies hold more than 80 percent of the market. The large wine companies typically own several wineries and may also be major importers.
Competitive Landscape
Demand for wine is driven by the restaurant and hotel industries, the level of business entertainment spending, and consumer income. A winery's profitability depends on production volume and sales price, both of which can vary from year to year. Large companies have stronger distribution channels. There are large economies of scale in production. Small wineries can compete with big-volume producers by making higher-quality wines that sell at a premium price.
Products, Operations & Technology
Wineries manufacture wine and brandies through fermentation of grapes and other fruit. Grapevines are tended in spring and summer and grapes harvested in early fall. After being crushed, the grapes (skins, pulp and liquid, called the "must") are fermented in large vats for several weeks. Fermentation is caused by the yeast Saccharomyces, found naturally on grape skins, that transforms the sugar of the grape into alcohol. After fermentation, the wine is pressed out and aged in metal vats for several months before being filtered and bottled. Some companies blend several different wines before bottling and may buy blending wine from other producers. Higher-quality wine is aged in oak casks for up to two years before bottling. White wines are produced by removing the grape skins at the crushing stage. Wine may be stored and shipped in tanks, barrels, and bottle case lots. Annual production for small wineries is under 50,000 12-bottle cases per year. A large winery may produce more than 500,000 cases.
The type of grape determines the taste of the wine, as do soil and weather conditions during the year. Many wineries grow their own grapes, but some (especially the large ones) also buy grapes from contract growers. A large winery could own more than 8,000 acres of land. High-volume wineries may buy most of their grape supply from independent growers. In 2003, Robert Mondavi bought 90 percent of its grape needs from 200 contract growers.
Contracts with growers may extend over several years, or may be for a one-year ("spot market") period. The cost of grapes can fluctuate substantially from year to year, depending on quality and yield. Many contracts for future purchase of grapes or bulk wine stipulate that market conditions will determine price, but other contracts have minimum price requirements. Despite having contracts, wineries don't know the final costs until after harvest, because of contract variables such as grape quality, vineyard yield, and market conditions. The average cost for California wine grapes in 2003 was $520 per ton.
Red and white wines each comprise about 40 percent of the US market, blush wines about 20 percent. Leading varietals (wines named after the grape they are made from) are Chardonnay, Pinot Noir, Merlot, White Zinfandel, Cabernet Sauvignon, Pinot Grigio, Syrah, and Sauvignon Blanc.