21st Annual Central Coast Insights with Experts and Troublemakers

by Laura Ness

Held for the first time in Paso Robles, the annual conference organized by the Wine Industry Symposium Group, attracted nearly 200 attendees from all facets of the wine industry. They learned about the current state of the Central Coast from bankers, lawyers, growers, wine makers, M & A experts, market research analysts, grape brokers and troublemakers.

David Freed, Chairman of The Silverado Group, painted an upbeat picture of the Central Coast’s position in the wine world, pointing out that most of the wines coming from the region are in the “sweet spot,” of $9 to $15 per bottle. Dominant varietals remain Chardonnay, Cabernet and Pinot Noir. Syrah, Zin and Merlot are on the decline. He predicts uptrends in 2015 sales for Chardonnay at 4%, Sauvignon Blanc at 19% and Pinot Grigio at 25%. Red Blends and Malbec are showing the fastest growth. Revenues for Central Coast wineries were up 10% over 2013 in 2014, while profits were up for 55% of wineries, down for 18% and flat for 27%. Over half, 55%, plan to increase production in 2015.

Brian Lechner, Vice President of Professional Services at Nielsen, has a wealth of data on consumer buying habits showing how wine sales are holding steady, despite the increasingly popularity of craft beer and spirits, especially among Millennials.

Data from supermarket and superstore scans shows that people are moving up from the $9 price point, which prevailed in the wake of the 2008 recession, trading up to the $12 to $15 range. While they are buying up, they are buying less. Wines under $7 are not doing as well as those above $9.

Varietal consumption patterns show wine drinkers shifting from Merlot to red blends, with 40% of new UPC’s being red blends. Over 5k new red blends were created in the last 5 years. Millennials, in particular, are attracted to blends.

There’s no place like home on the Central Coast, according to the entertaining Rob McMillan, EVP & Founder of the Wine Division of Silicon Valley Bank, who creatively employed the Wizard of Oz to make salient points about the state of the world economy, and its effects on the all important consumer. Some takeaways here included:

1. The US economy is strong and leading the rest of the world into recovery. Threats are mainly from the unstable portion of the world, including Russia, Argentina and the Middle East.
2. Due to fracking, US oil is in excess supply, about to exceed its storage capacity. Since US oil companies cannot sell domestically produced crude products outside the country, it’s a matter of time until gas prices fall again giving consumers more discretionary cash for luxury items, i.e., wine.
3. Restaurant sales of wine are now outpacing grocery spends as of January 2015. 30% of all fine wine sales (+$20/bottle) go to restaurants.
4. Wine pricing will increase in 2015: among 600 west coast wineries surveyed, 44% will enact small price increases, 14% will raise prices moderately, while 2% will see strong increase. On the flip side, 34% will hold and 6% will decrease prices.

Although suffering serious jetlag from a trip to Europe, Randall Grahm, President for Life of Bonny Doon Vineyard, stated his case that America needs to get better about matching varietal to site, as the Europeans have long done. “Get over the idea that choice of variety is the most important element of quality. Site is primary. Seek the convergence of wine, vine and soil.”

Grahm made an impassioned plea for increasing viticultural diversity by breeding new grape varietals in response to climate change that are also disease resistant. “Here in the New World, we have permission and freedom to do what we want.”

He bemoaned the continued focus on Chardonnay. “We should create wines that are unlike anywhere else, utterly differentiated in style.”

Wineries looking for a succession plan need to be aware of complex inheritance rules, according to Michael Morris and William Douglass, of Andre, Morris & Buttery, who work closely with Joe Ciatti of Zepponi Group to handle many of the M & A’s that occur in California. Some takeaways:

• The estate tax exemption is now at $5.4M per person, making it $10.8M for a married couple.
• Gifts of $14K per donor/donee can be made to children and grandchildren yearly: use it or lose it.
• Everything must be in writing: trademarks, grape contracts, land leases, vineyard leases, property titles, wine inventory, water rights/easements, distribution agreements, development and use permits.
• COLA approval does not grant you IP or TM protection. Make sure you trademark winery names, wine names and label designs. Also ensure your trademarks are not infringing on others.
• Owners should be careful about signing lengthy consulting agreements during the transition period, and be aware that non-competes are limited by CA law to a max of 3 years and to geographic area.

Matt Turrentine, Partner, Grapevine Capital Partners, reviewed the critical impact the recently passed — and controversial —California Sustainable Groundwater Management Act, signed into law in September of 2014, would have on agriculture. He noted that while the law had significant opposition, a handful of folks who saw the writing on the wall steered it into effect. Among his observations:

• It had been 100 years since meaningful legislation had been passed (1914) governing the use of shared water resources like rivers.
• SGMA requires all high and medium priority basins (the majority of the Central Coast) to have a GSA (Groundwater Sustainability Agency) in place by 2017, and a GMP (Groundwater Management Plan) in place by 2022. The State Department of Water Resources must approve the GMPs.
• Basins that do not establish self-governance will be taken over by the state: precisely the teeth intended to drive local governance of local water issues.
• Paso needs to create a water district, but its problems are solvable compared to other areas: e.g., the ground is sinking in Madera and draconian cuts are coming to ag interests there.

The highly animated Wes Hagen, Vineyard Manager/Winemaker at Clos Pepe, and AVA Consultant, gave a rapid-fire condensed version of 200 million years of wine history, noting everything that ferments (beer, honey, wine, grapes) is attractive to animals.

“Nature wants us to get high, consume and spread seeds,” said Hagen. He also asserted that red wine grapes have the highest concentration of fermentable sugars; grapes grow best between the 30^th and 50^th parallels, and between 10 and 20 degrees C; Romans didn’t conquer a region until they had established vineyards and that a “symposium” in Greek times consisted of half crocked Athenians drinking 4 or 5 bottles of wine and engaging in passionate political discourse. Hagan advocates investing in a really good wine as a means of “saving table,” referring to quality time spent with family and friends, calling this “the last meaningful analog ritual.”

Moderated by Matt Kettman, Editor of Santa Barbara Independent and Wine Enthusiast, a panel of wine professionals addressed the issue of “Central Coast Diversity: Blessing or Curse?” Almost all of them pointed out that the diversity of their own portfolios and the range of varietals they have in their vineyards provides complexity enough. Most pointed to their frustration in dealing with different channels, especially distributors, who seem uninterested in promoting wines outside the dominant varietals.

• Marta Kraftzeck, Winemaker at Scheid Vineyards, crushed 34 varietals in 2014, from 4600 vineyard acres and indicated her company continues to experiment with oddball varieties, planting Fiano, Dolcetto and 15 clones pf Pinot. “The world is awash in Chard & Cab: people are looking for something different.”
• Mike Sinor, Winemaker, Sinor-LaVallee, says his Ancient Peaks brand consists of 18 varietals, but only 5 are in national distribution. “We pulled Chard in favor of Sauv Blanc as our white. People find us in the market, then come to the tasting room to see what we do and they love the variety. “
• Tim Snider, President of Fess Parker Winery, grows Pinot, Chard, Riesling and Rhones. They created the “Epiphany” brand to focus on high-end Rhone style wines, and the “Parker Station” label for distribution. “I have to beat up on the distributor to take Grenache Blanc, even though Somms love it.”
• Karen Steinwachs, Winemaker, Buttonwood Farm, loves variety, and was excited to hear red blends are on the rise, considering they grafted Merlot to Malbec, Petit Verdot, Grenache Blanc and Grenache in 2008. Their largest plantings are Sauvignon Blanc and Cabernet Franc. Constant internal challenge is adjusting wines to Tasting Room, Distribution and Wine Club. The biggest external challenge? “Santa Barbara County has to promote that we are everything to everybody.”

Throughout the panel discussion, their comments seemed to underscore the statement Rob McMillan made early on. “Central Coast as an AVA is too huge. Livermore is not Santa Barbara. When people outside the region think of the Central Coast, they think of Monterey/Carmel and south. When they drive down highway 1, they don’t see vineyards.”

He made an astute comment: “Don’t say ‘Central Coast.’ Define yourself.”

Perhaps words to the wise.