THE US WINE INDUSTRY1
Armand Gilinsky, Jr. (Sonoma State University)
Raymond H. Lopez (Pace University)
How do firms in the US wine industry produce, compete, and distribute their
products?
Wine Production
Producing wines was capital intensive. Vines planted in a given year did not become productive on a
sustainable basis for at least four years, with optimum output reached in the seventh year. Land
upon which grapes were grown could be obtained and used in one of three ways. It might be owned
and managed by the wine producer. Alternatively, the producer might contract with landowners to
purchase their grapes annually. Finally, the landowner could allow the producing firm to plant and
manage the growth of the vines, harvesting the grapes with its own personnel and simply paying the
landowner for these privileges.
As an agricultural process, grape growing was subject to a variety of risks. Varying weather and
climactic conditions could have significant effects on grape yields per acre in any given year. Vines
were also susceptible to pests that could adversely affect any given crop. As there was only one grape
crop available per year, a combination of factors could have a significant adverse effect on grape
supply and, consequently, the volume of wine produced and available for sale.
Harvesting equipment, along with crushers and fermenting tanks, was expensive, and yet used only
one to two months per year. They had no other use and therefore were idle for up to ten months per
year. After fermentation wine was pumped into barrels for aging. These barrels cost $600 to $700
each and had a useful economic life of five years, with almost no residual value. While white wines
remained in barrels for up to a year before bottling, most red wines aged in barrels for two years or
more. Generally, the quality of the final red wine increased with length of barrel aging. Also, barrels
needed to be “topped” every one to two weeks, since some wine was lost through the pores of the
wood. Over a two-year period approximately five % of wine volume was “lost” through the
“breathing” process. Full maturation prior to sale sometimes took another two to three years. These
additional maturation cycles to create quality wines tended to greatly increase inventory investment
costs.
Table wines comprised over 80% of total wine industry sales in the United States. Grapes used for
table wine production could be of varying quality. Varietals—such as Chardonnay, Merlot, Sauvignon
Blanc, Pinot Noir, and Zinfandel—were delicate grapes from vines that typically took at least four
years to mature.
Regulatory Environment
The US Alcohol and Tobacco Tax and Trade Bureau (TTB), prior to January 2003 had been a
division of the Bureau of Alcohol, Tobacco and Firearms (BATF). The TTB was overseen by the US
Treasury and regulated all alcoholic beverage sales in the United States. The TTB’s truth-in-labeling
standards stated that one variety or varietal—the name of a single grape—could be used if not less
than 75 % of the wine was derived from grapes of that variety, the entire 75 % of which was grown in
the labeled appellation of origin. Appellation denoted that “at least 75 % of a wine value was derived
from fruit or agricultural products and grown in place or region indicated.”
In addition to federal regulations and excise taxes, a myriad of state laws and regulations restricted
the sale of alcoholic beverages. These laws in most states required wineries to sell via a “three-tier”
distribution system (winery to distributor to retailer to consumer). Distributor consolidation
increased substantially after the May 16, 2005, Granholm v. Heald United States Supreme Court
decision that prohibited discrimination between in-state products and products from out-of-state.
This decision subsequently served to increase liberalization of shipping wine across some state lines,
direct from producers to consumers.2
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