A $400 million Contraction in Wine Sales is Coming

On the stunning revelation of Chateau Ste. Michelle's decision to cancel 40% of their vineyard and grape contracts

Chateau Ste. Michelle, by far Washington State’s largest winery, announced last month in a meeting with Washington State grape growers, that it would be reducing its annual purchase of grapes by 40% over the next five years. The impact of this move is large. Very large!

First, let’s look at what this means.

According to Sean Sullivan of the Northwest Wine Report, a 40% reduction in grape purchases by Ste. Michelle amounts to a reduction of 10,000 acres worth of grapes being purchased by the behemoth wine company:

“To give a sense of the magnitude of what a 40% decrease represents for the winery and the industry, in 2017, then CEO Ted Baseler stated that Ste. Michelle contracted with 35,000 of Washington’s 50,000 acres. In recent years, that number has been reduced to approximately 28,000 acres despite the state’s total wine grape acreage increasing to 60,000 acres. While SMWE’s discussion with growers focused on grape production rather than acreage (the winery has a mixture of acreage and tonnage contracts), this would equate to approximately a 10,000-acre reduction.”

Keeping in mind that Sullivan’s estimates are conservative, what does this all amount to?

1. At an average of about 4 tons of grapes per acre, a 10,000-acre reduction equals 40,000 tons of grapes purchased.

2. At the 2022 average price per ton of Washington State grapes of $1,370, this amounts to a reduction of $54,800,000 in payments to growers for grapes.

3. The 40,000 tons of grapes Ste. Michelle will no longer be purchasing amounts to 2,400,000 cases of wine.

4. At the national average of $14 per bottle of wine sold at retail, this amounts to a reduction of $403,200,000 in sales at a minimum.

These are “back-of-the-napkin” calculations, but you get the point. The impact of this move on the Washington wine industry over the next five years and beyond will be massive.

Chateau Ste. Michelle was recently purchased by Sycamore Partners, a private equity firm from New York. Its holdings of Washington wineries include:

Chateau Ste. Michelle
14 Hands
Burne of Fire
Col Solare
Columbia Crest
Domaine Michelle
Drumheller Wines
Intrinsic Wine Company
Northstar
Merf
Prayers of Sinners & Saints
Red Diamond
Seven Falls
Snoqualmie
Spring Valley Vineyards
Two Vines Wine

In addition to these Washington-based wine brands, Sycamore also owns A to Z, Erath, and Rex Hill in Oregon; Conn Creek, Patz & Hall, and Hawk Crest in California; and has partnerships with a number of other producers including various international brands.

I’d be shocked that as part of the process of shaving 10,000 acres of Washington grapes some of the above-mentioned brands didn’t disappear over the next five years. But that’s not as important as the question, what does this move by Ste. Michelle say about the state of the American wine marketplace?

Whatever it says, it’s not good.

It’s difficult not to see this move as a negative reaction by Sycamore Partners to the future of the American wine marketplace as opposed to simply a bearish view of Washington wine. Between a soft economy still feeling the impact of the COVID disaster, the increase in competition for share-of-mouth by spirits, RTDs, and other alcohol options, what appears to be a slow retreat from alcohol consumption by Americans, and the continued increase in access to alternative inebriation options such as cannabis, it starts to become easier to understand this move at Ste. Michelle.

At this point, I’m obligated to draw your attention to the comments of Vicky Scharlau, executive director of Washington Winegrowers (the trade association for Washington State-based grape growers) as quoted by Sullivan in his article for WineBusiness:

“Unless the wine category rebounds magically reducing the inventory backlog of wine and bulk wine, our acreage needs a reduction of about 10,000 acres. That said, there are opportunities for those willing to be creative and willing to work together to identify and remove barriers to trade and to markets, and to consider the unknown.”

There is a hint of pessimism, as one would expect, in Scharlau’s assessment that it would take a bit of magic to see a rebound in sales so as to effectively reduce the backlog of wine in the pipeline. But the interesting thing is her somewhat cryptic note that opportunities exist “for those willing to be creative and willing to work together to identify and remove barriers to trade and to markets.”

The barriers to trade and markets are myriad in the American marketplace whether we are talking about labeling restrictions, archaic state distribution laws, oppressive business regulations in the alcohol space, or direct-to-consumer sales and shipping laws. This makes Ms. Scharlau’s comments both obvious and insightful.

The impact of this pullback by Chateau Ste. Michelle is incredibly significant and the impact of it will be felt by the state’s grape growers immediately and over the next decade—at least. The move will alter the price of grapes that growers obtain for their crops. It will impact the overall pricing of wines produced in Washington. It will impact the bulk wine market as well as the private label channel. And it could subtly impact the reputation of Washington wine as a whole.

Finally, it leads to the question, what is the next shoe to drop when it comes to the largest wine producers in America? Whatever Sycamore Partners sees that leads them to make this kind of move, other producers also see.