Who’s Buying Kiwi Sauvignon Blanc?

(Originally published August 2009)

Working in the wine business on a regular basis, some things escape notice. Even from the God’s Eye view of Hanes. It was just fairly recently that Hanes noticed he doesn’t sell much New Zealand Sauvignon Blanc anymore. Why is that? It seems there are many likely factors. So, let’s factor them in!

Back in tha day, circa 2001 or so, New Zealand Sauvignon Blanc was a king of the case stack. It was cheap and tasty and different in flavor profile from domestic or French versions. You could stock 4-5 different brands and they would all sell, people just loved them. There was a great deal of value, both perceived and real. Plus, you also had the “flagship” brand of Cloudy Bay which leant some cachet to the category as being capable of “world class” wine. Then you sold the cheaper stuff as “just as good as Cloudy Bay, but half the price!” There was a period in time when New Zealand Sauvignon Blanc was on top of the heap, with brands like Villa Maria, Selaks, Babich, Brancott, Allan Scott, Nautilus, Kim Crawford, Oyster Bay, Glazebrook, Isabel, Red Hill, Omaka Springs, Grove Mill, Nobilo, Matua Valley, Spy Valley, Lawson’s Dry Hills, Mud House, Coopers Creek, Saint Clair, Sileni, Cairnbrae, Drylands, Whitehaven, and Forefathers all selling well.

Has this trend stopped or leveled off? What market share trend changes are happening? Wine purchasing and enjoyment is certainly faddish in many respects, and one day’s rock star is next year’s dud. Did someone take the starch out of New Zealand’s pants? Who are the people who continue to buy New Zealand Sauvignon Blanc and who are not? And why?

A little background information is helpful. New Zealand had 238 wineries in 1996 and 585 in 2008. The country had 6,610 hectares planted to vines in 1996, 29,310 hectares in 2008.

In 2008, of those 29,310 hectares planted, 15,915 were in Marlborough, 4,899 in Hawkes Bay. Of the 29,310 hectares, 13,988 were Sauvignon Blanc, 4,650 Pinot Noir and 3,881 Chardonnay. This makes Marlborough Sauvignon Blanc the heavyweight champ of New Zealand.

Australia, UK and the US remain New Zealand’s top three export regions. The stats above give us a sense of the big time growth the wine industry has had in New Zealand over the past dozen years or so. Again, in the beginning, the largest percentage of the wines were cheap, everyday drinkers. Say, $12 and under. Given the tropical fruit flavors, bold citrus notes, as well as cat pee and jalapeño pepper accents found in Kiwi Sauvignon Blanc it overperformed for what you paid. And everyone liked to say their wine smelled like cat pee.

In contrast, domestic Sauvignon Blanc usually cost more or was softer in profile by comparison. The only stuff cheaper on the whole were Chilean Sauvignon Blanc wines, many of which were herbaceous and nasty. South Africa Sauvignon Blanc hadn’t really penetrated the buying public’s consciousness yet. French Sauvignon Blanc was usually bought by people who already knew that Sancerre and Pouilly-Fumé were Sauvignon Blanc and these were rarely cheap enough to case stack. OK, Maybe some Vin de Pays du Jardin de la France Sauvignons were that cheap. Be that as it may. who remembers exactly why, but the New Zealand shit was the bomb.

Over time, sure, prices started to creep up. Some producers aspired to “Cloudy Bay status.” Other more “boutique” wineries finally had their wines exported in tiny numbers to the United States and these were usually close to and beyond $20 a bottle. As with most emerging wine regions and wines, New Zealand Sauvignon Blanc wanted to be “taken seriously.” But, curiously, with exports to the US seemingly increasing, the actual wines can be to be harder to find on store shelves.

If anything, the vast growth in number of wineries and hectares under vine should have helped keep prices low. Demand was there but supply was keeping up pretty well. There were some poorer vintages hurt by bad weather but these were often balanced out by bumper crop years. So, it doesn’t seem like supply problems frustrated customers or contributed greatly to rising costs. The product has been consistently in the market. If anything, at this point in time there is oversupply of grapes, 2008 and 2009 both being large crops. In many instances grapes are being left on the vine to rot and contracts between growers and large corporations (e.g., Pernod-Ricard) are being bought out or renegotiated. This would usually suggest a moderation or drop in prices.

New Zealand is in the process of achieving an important landmark, this being annual exports of more than $1 billion. This for an industry that exported only a little more than $100 million of wine a decade ago (figures in New Zealand dollars). 2008 exports to the US of Sauvignon Blanc was reported as up 37% over the previous year. However, note that reports have total export volume of bulk wines in the same period quadrupling to nearly 20%. So, it’s not like it was a 37% increase in $20 retail bottles. In any event, the wine keeps on coming, the numbers ain’t lying. Just at what price is the question.

Are there any pertinent exogenous influences which are hampering the sales of New Zealand Sauvignon Blanc? The weak US dollar surely plays a role in price increases. But not enough that the normal tango of supply and demand would not have moderated this influence. International competition is another factor. When Hanes looks at all the wholesaler lists, he can’t find many New Zealand Sauvignon Blancs which would retail for $9.99 or $10.99. There’s no problem finding Sauvignon Blanc wines from South America and South Africa at these prices (and the quality of both have improved over recent years). Hell, a Californian or two might sneak in as well at that price. One might aver that this is an issue of “decoupling” where all the excess juice gets sold in bulk to make wine-in-a-box or some Trader Joe’s special and the rest stays at a “premium” level of, say, $15.99 or more a bottle. Hmmm, have to go to Trader Joe’s and see what they have. Hanes can say that sales in the places where he has worked of late are flat and, anecdotally speaking, no one is asking for any special orders either.

So, it’s a mystery. Thumbs up or thumbs down? The export numbers suggest a steady or increasing volume of wines being sent to the United States. But no one is asking for them in Charlotte. Maybe it’s a geographical things where back in New York City the wines are still popular but here in North Carolina they don’t have the same healthy market share. In a local Total Wine’s online stock list, of the 70 cheapest Sauvignon Blancs being sold, 11 are from New Zealand, or 16%. Maybe this is a solid percentage number and Hanes’s personal experiences are out of step with reality. Been known to happen. On the website of Manhattan wine purveyor PJs Wine Warehouse, 42 Sauvignon Blanc-based wines are listed, 11 of which are from New Zealand or 26%. That sounds more like it.

The industry must be doing well on the whole, glut notwithstanding. California-based Foley Family Wines recently purchased the five-winery portfolio of the New Zealand Wine Fund (including Vavasour, Goldwater, Clifford Bay and these wineries’ other subsidiary labels). Foley seems to know what they are doing. They make more money than Hanes. They must see a bright future for New Zealand’s wine industry. But the “decoupling” argument might be really what’s going on. A July 2009 article on Stuff.co.nz offers the following:

“Wine producers are concerned that heavy discounting throughout the industry is affecting the reputation of New Zealand wine, at home and abroad.

Blair Gibbs, the head of Wine Marlborough says that for the first time ever, three bottles of Marlborough sauvignon blanc can be bought in the UK for just ten pounds (NZ$25). [This NZ$25 would be $17.12 USD or $5.71 per bottle.]

‘The level of bulk exports to the UK is staggering and we are seeing our market position which has taken 30 years to build being eroded in one year.’ Gibbs said.

He said comments by several influential commentators, criticising the discounts offered by some wine producers, have damaged the New Zealand brand.

‘The consumers are loving (most) of it and there's an argument to say that new consumers are being drawn into the Marlborough category.’

‘The flip side is that the value has gone and the brand Marlborough is heading in the wrong direction.’”

Maybe what’s happening is similar to much of what has been happening in Australia. New Zealand Sauvignon Blanc is either being sold as a bulk product to grocery store chains or discount retail chains who can then undercut independent retailers or aspiring to the fine wine arena of $20 and up. That’s not leaving a lot in the $10 to $15 range with the exception of some big established brands like Babich, Villa Maria, Oyster Bay, Monkey Bay, etc. Which aren’t exactly “unique,” meant as in delivering the same quality and diversity of flavor they did around eight years ago.

Wither Kiwi Sauvignon Blanc?

New Zealand itself is a country with wine growing regions spanning the latitudes of 36 to 45 degrees and covering the length of 1,000 miles. This includes the most southerly wine growing region in the world, Central Otago. Its temperate, maritime climate has a clear influence on local viticulture. The vines are warmed by strong, clear sunlight during the day and cooled at night by sea breezes. If bumper crops continue and growers can’t get their prices or sell their grapes at all, Hanes sees the decoupling continuing, creating an absent “middle class” of wines. This, unless temporary labels pop up to act as a release valve for the excess juice, just exist while the glut lasts and then disappear.

Two factors which will also play a role in the near term as these. First, New Zealand takes great pride in maintaining “sustainable” agriculture. Evolving viticultural and vinicultural practices are supposed to ensure sustainable environmental care of the land and all the shit sprawled over it. The New Zealand wine industry seems to think that there is a growing world demand for wines that have been produced in a “clean and green” fashion. That is yet to be seen. It’s a global recession and the jury is out on the production costs of maintaining sustainable viticulture. When times are tough, can the Kiwi wine industry afford to stay green?

Industry sources note that Sustainable Winegrowing New Zealand (SWN Z) has evolved to become a world-leading program with 85% of total production capacity now onboard. The general goal is 100% by 2012. It’s hard for Hanes to find the relevant stats on what the cost of this program is to the participants. Being green is laudable, unless it puts you out of business. But, hey, for all Hanes knows being green may cost less than being, err, whatever not green is. Hanes’s bet, though, is on more expensive. And organic winegrowing is becoming popular too. We’re waiting for biodynamic principles to get a toehold. Organic and biodynamic are cheap, right?

Second, there’s the still undecided factor of global warming. These days usually referred to as “climate change.” The powers that be continue to debate the existence of global warming and its severity, all this framed in near term and historical horizons. Smarter people than Hanes are figuring this out. Wait, there’s someone smarter than Hanes? No way.

Anyway, temperature change, as well as increased unpredictability vintage to vintage, will have an effect on New Zealand. One could argue that due to New Zealand’s unique geographical location and the configuration of its two islands and their vineyards, that global warming would effect New Zealand as much if not more than the majority of the world’s winegrowing regions. If temperatures in New Zealand rise by one or two degrees, as some have predicted, wine growing could spread to other areas of the country which are currently too cold or wet to properly grow grapes. In turn, the warmer areas of Gisborne, Hawkes Bay and Marlborough would likely see more ripeness in their grapes. Which could be a good thing or a bad thing. Depending on if the weather change alters the flavor and aroma profiles of the wine as well as acidity, phenolics, etc. They say if it ain’t broke don’t fix it — if people like New Zealand Sauvignon Blanc as-is, maybe they’ll like it less with generally warmer weather. Or the weather can simply become more unpredictable with dramatic temperature swings, unexpected frosts or heatwaves. Which could turn out to be the bogus pipeline for the wine industry.

Put climate change together with the commitment to sustainable agriculture and who knows what could be needed to keep producing Sauvignon Blanc as recognizably from New Zealand. Will adequate water be available for irrigation? Will some vineyards become unsuitable while new, perhaps higher elevation, areas become suitable? How to sustainably swap one vineyard for the other? And retain a coherent industry reputation for certain wines made in certain styles?

These industry problems discussed above are noted by Jim Delegat, Managing Director of Oyster Bay in the August/September 2009 issue of New
Zealand WineGrower:

“For our international retailer partners, importantly, we represented a new and unique offering in a growth category balanced by a credible quality/ supply and value proposition resulting in sustained increase market share and profit generation for them. This is a most important dynamic of successful international business.

As a result of our own making, the paradigm has now shifted irrevocably with reference to the supply/demand imbalance and a perceived or real diminishment in product excellence resulting in considerable negative international press.

This also, sadly, has the yet to be felt negative impact of completely reshaping the medium to longer term global demand curve/image and value proposition of New Zealand wine and something that will affect all industry participants by way of diminishing financial returns.

The real and lasting consequence of this is that we are in danger of losing our ability to manage the sustainable quality of our future financial earnings and the benefit of reaping capital appreciation of our industry investments.

This is evidenced by the fact that in less than two years a bulk wine commodity market has established that will continue to be sustained by the growing surplus supply of Marlborough Sauvignon Blanc grapes and further, grapes are now being left unharvested on the vine.”

He goes on to say:

“As a result of our own circumstances we have given powerful retailers the opportunity to establish their own proprietary high volume Buyers Own Brands and secondary labels which invariably retail at considerably below required industry price points.

No new large untapped markets have being identified and existing markets do not have the potential to consume such volumes at required retail price points.

The outcome can now only be that the New Zealand wine industry is entering a period of reduced financial returns.

The obvious conclusion can only be that as a result of inadequate knowledge of the global market, poor brand, distribution planning and investment criteria driven largely by opportunistic investors over recent years has resulted in an enormous surplus of unwanted Marlborough vineyard plantings that are yet to come into full production.”

Dang. That's like saying we’re killing ourselves by making cheap generic (and generically branded) plonk or by pricing ourselves out of the competitive premium market.

In the same article Fabian Partigliani of Pernod Ricard NZ echoes these sentiments:

“More concerning is the dramatic growth of bulk exports which have cannibalised the growth of branded wine and put immense pressure on the NZ price premium which supports the industry.”

It’s hard to read between the lines and figure out just what the “sweet spot” for the industry is supposed to be. No doubt, industry leaders don’t think it’s a bottle of Sauvignon Blanc being sold for US $5.71 in England. But do they desire a broad range of consumer choice in the $10 to $15 range here in the States? There’s a big concentration of market share among a few brands $15 and under. Anything more individually crafted creeps up into the $20’s. Hanes is saying, if these leaders of New Zealand’s wine industry want to win back customers and market share, brands (and new brands) have to be built in the $10 to $15 range. That’s where people are buying. And where the industry can avoid the margin squeezing of gluts and cheap chain brands eroding grower and winery profits. That said, creating “world class” Sauvignon Blanc doesn’t mean it has to cost $20 and up. But if it does, who will be buying?