The British Columbia Wine Report – August

It’s Time for B.C. Wineries to Look Further Afield
by Rhys Pender MW

Rhys Pender MW

In British Columbia, we have a strange pricing system for wine, a system that a lot of consumers will not know exists. It is a system not built on the direct cost of making the wine plus markups but rather one of setting a goal final retail price and then working backwards with a series of different discounts depending on which distribution channel the wine is sold through. Needless to say, this isn’t how the rest of the wine world, or any other business that I can think of, operates. While you might say “who cares, it is what it is”, this pricing system has an impact on the way British Columbia wineries do business, especially in times when supply creeps ahead of demand.

Right now, the British Columbia wine industry is in just such a state. Wine production is currently growing at a faster rate than sales. While this may be temporary, there are significant impacts on the short-term stability of the industry. For many years, demand for British Columbia wine far outstripped supply creating a positive environment for wineries to expand, invest in equipment and improve quality. Because of this profitability, many new vineyards were planted and new wineries started to take advantage of the booming industry. The big growth period came between 2006 and 2008 when the acreage leaped from 6,632 acres in 2006 to 9,100 acres in 2008, a 37% surge in just two years. With around three years until a crop is realized off a new planting, the supply should have jumped in 2008, 2009 and 2010. We all remember a significant financial crisis that hit at exactly this time, which resulted in a big dent in demand for higher priced wines.

If it wasn’t for Mother Nature stepping in, the supply and demand issue would have been a lot more serious. In the end, cold winter temperatures damaged many vineyards in 2008 and 2009 reducing crop significantly and resulting in lots of replanting of damaged or killed vines. In fact, production levels didn’t significantly top 2008 levels until 2012. Just a few months ago the British Columbia Wine Institute announced the 2013 crop level as 31,383 short tons harvested, another 18% increase over the record 2012 (27,257 short tons), itself an increase of 20% over 2011 (22,722 short tons). Rumours abound of grape contracts being cancelled and stocks building up in winery warehouses.

Sales of VQA wines increased 11.4% in volume in 2013 (3.7% in 2012), significantly better than the wine category over all but still falling well behind growth in supply. Figures reported by the British Columbia Wine Institute show production levels of about 1.9 million cases (2013) with sales volumes of 1.1 million cases (2013/14). By my quick calculations, if production levels stay the same and sales rates continue growing at 11.4% it will be 2019 before demand for British Columbia wine balances supply. Time to rethink how and where the wine is sold.

A few things have happened as a result of the oversupply. The first is that growth in acreage has slowed down, now steady with around 10,000 acres planted (the results of the first grape acreage survey in three years should be out this summer). The second is the significant increase in the number of wineries as many of those growers whose contracts were cancelled chose to add value to their crop by starting a winery rather than taking a big hit on grape prices. Grape prices in British Columbia are amongst the highest in the world, but making and selling wine is still much more profitable, even if many underestimate the difficulty of slicing off a chunk of the market. The number of wineries in the province has grown from 131 in 2006 to 232 as of July 2014 making it increasingly hard for the new wineries to establish themselves in what is already a competitive marketplace.

There is really only one answer to correct the oversupply – sell more wine outside of British Columbia. Because of the preferential pricing system British Columbia wineries have in their own Province, there has been little incentive to look further afield. Neighbouring Alberta has to be the number one target but even here few wineries currently have a presence. The reason is money. Basically, the high profit glory days where everyone can sell everything they make through high profit channels are over for many wineries.

Pricing strategies that the rest of the wine world uses will become more commonplace in British Columbia and top quality wines rather than creative brands will be the only way to justify higher prices. Instead of starting with a target price and working backwards, wineries will need to develop a FOB (free on board) pricing model where they set a base price for which the wine can leave the winery and then let the market costs of broker, agent, shipping, taxes and markups be added beyond that. It would not be surprising if many wineries do not know what their FOB price would be because of the way pricing is calculated in British Columbia. If a winery knows what figure they are willing to sell a case of wine for, they should not care which market it goes to. Guaranteed, the price of selling outside the Province will be a lot lower than the high profit channels of selling direct to consumers or restaurants in British Columbia, but it will open up new markets, increase demand and sell the excess supply.

There is always the option of lowering prices but this too will have a significant effect on the industry as the challenging climate of British Columbia makes it a very expensive and sometimes risky place to grow grapes. Also, when supply and demand do come back into balance, the prices would have to increase again, something never popular with consumers.

The government in British Columbia is helping out by opening up some small new distribution channels, such as farmers markets, and overhauling liquor laws but with the higher average price of British Columbia wine ($17.75 a bottle in 2013/14 versus approximately $12.79 for import wine) it will not be enough to soak up all the extra production. Whether lowering prices or pushing the export market, for winemakers the car in the driveway may be a little less fancy, the holidays shorter and closer to home and the brand new state of the art winemaking equipment may have to wait a few more years, but the business will be viable beyond relying on preferential local market treatment.

There are other benefits that go along with wider distribution too. Those in the British Columbia wine industry often voice their disbelief that their wines aren’t better known in the wider world, but with such narrow distribution it is not a surprise. If the wines start appearing across Canada, in neighbouring States in the USA and further afield, then the reputation will start to grow. Canadian wine can stand $ for $ on quality and as long as the pricing is calculated to compete with the global competition in these markets, success will follow. But that means giving up trying to make the same profits as selling a bottle out of the front door of the winery.

The British Columbia Wine Institute has seen this developing for years and has been working on an export strategy to encourage wider distribution. While many wineries are quite able to sell their entire production in the local market, this is impossible for the current level of wine production. More and more it is becoming necessary for wineries to get on board and develop their own strategy to export across Canada and beyond. It is time for those with wine sitting in cellars or warehouses to take a serious look at how much they need to charge for a box of wine (the FOB) and start looking at selling it far and wide. The bonus will be drawing some attention to all the great things happening in the British Columbia wine industry.

Rhys Pender MW

British Columbia photo credits: Treve Ring

Advertisements