Understanding the California Bulk Wine Market

Steve Katz 

Hi, everybody, and thanks for taking time out of your busy schedule to listen in on our Hilco Global Smarter Perspective podcasts. As return listeners know, I’m your host, Steve Katz. And if this is your first time listening in welcome, we’re glad you could join. Today we’ll be talking about one of my personal favorite topics, wine. Unfortunately, for me, however, this will not be a taste test. But it’s kind of the next best thing because we’ll get some insight on that beyond being generally interesting. We will also be providing some helpful information for lenders involved in either evaluating prospective borrowers or existing portfolio accounts that are involved in the California bulk wine industry. And with us for that discussion today is Sandy Mickas, valuation director at Hilco valuation services, who has appraised numerous businesses in many areas of the wine industry, including traditional and estate wineries throughout California, and Washington state as well as E-commerce retailers, purchasing and bottling, both foreign and domestic wine. So Sandy, welcome to the podcast.

Sandy Mickas 

Great to be here. Thank you.

Steve Katz 

Yeah, absolutely. Thanks for joining us. You know, I’m thinking to get us rolling, maybe you could provide a little bit of background on the bulk wine industry. Because I think, you know, there could be some misperception of that language, bulk wine, particularly among those who are not yet directly involved in the market.

Sandy Mickas 

Yeah, I’m happy to do that. It’s pretty simple. Actually. Sometimes, you know, we’re concerned people think of Boxed Wine, as both wine or as an inexpensive wine. But that’s not the case. Bulk wine is actually wine that’s in the process of aging, either in a barrel or a tank, it’s wine that could be either fully aged, or it’s wine that it has just been processed. You know, the grape crush. Now it’s aging in a tank or a barrel, but it’s considered bulk wine in that it’s not packaged finished wine ready to sell. So there’s definitely you know, if there’s any misconceptions about what bulk wine is, you can think of it as is in process wine that still needs to either age to be completed, or it needs to be packaged in order to be sold. Now, that’s not to say bulk wine isn’t sold as bulk wine. But that would be, you know, between various wineries, it’s very typical for winemakers to purchase bulk wine to supplement their existing supply. If you know maybe they’re short on one varietal, or something like that. And in some cases, some winemakers don’t want to purchase grapes and do a traditional winemaking they simply want to buy bulk wine and blend it with other bulk wines to get, you know, whatever type of wine that they’re looking for. So that’s in a nutshell, bulk wine, you could just think of it as work in process from a lender’s perspective, even though it could be sold as bulk wine. It’s just not a finished good ready to sell to a consumer.

Steve Katz 

Okay, that Yeah, I think that’s pretty helpful clarification. And what are some of the key factors that have traditionally impacted the bulk wine market over the years

Sandy Mickas 

For California bulk wine specifically, and I think it’s important to make that distinction that we’re only talking right now about bulk wine, that’s sourceed from California. And the reason that’s important is because the appellation or where the grapes are grown, is one of the biggest factors in valuing bulk wine. And you’ll see it throughout the industry. And in California, there are different areas regions in California, where grapes in certain regions will be more valuable or are assumed to be more valuable than grapes grown in other regions, and that corresponds to the wine so if you have wine that’s made from grapes in Napa, for example, that’s gonna be your premium higher quality than say something in you know, Southern California or something like that. So the location where the grapes were sourced and grown is one of the biggest factors that is utilized when valuing bulk wine. And also obviously things like the vintage year that would be the year that the grapes were harvested and the varietal, which would be the type of grape which often dictate the type of wine. Now obviously, you can have a red blend, for example, and there will be bulk wine blends, where they’ll take a little bit of, say Cabernet and a little bit of Merlot and blend them together. So you do find things like that where maybe the varietals isn’t as critical when you’re doing a blend, however, most winemakers will want to buy a, you know, unblended wine typically, like just sourced Cabernet or Merlot, they don’t typically want to buy something that’s already been blended. So if you were to see something like that in the marketplace, generally not going to have as high of a value if it’s already been blended, because most winemakers wouldn’t want that. So. And, you know, there’s a lot of environmental factors that go into it, we’ve seen fires and Napa in 2020, they had a huge fire there, which impacted the grapes, which, you know, even though some vineyards were destroyed, and obviously those grapes are destroyed, and some were just affected by the smoke, which they call smoke taint. So then those grapes, even though the grapes weren’t destroyed, they weren’t viable for wine, because they have a smoke flavor that is not conducive to making wine. And so even though they had to harvest all those grapes, the wineries, if they couldn’t use them, or sell them, that was a big issue. So things like that, obviously can happen that we look for it. And that also impacts the bulk wine market, because in those years, like in the year of 2020, bulk wine that was available for sale on the market already got a premium price, in some cases, because people were desperate for wine because their crops were no good. And so they would have no wine for that vintage year. So, you know, environmental factors such as that definitely can make a difference. You know, same with, you know, rain years, there’s some years or bumper crops and, you know, some years or the crop yields are very low. So, things like that also impact the market as far as the pricing when you have bumper crops, and you have an abundance of wine, you know, that obviously brings the prices down. So a lot of different factors are affecting the bulk wine market.

Steve Katz 

Yeah, I it’s, it’s interesting, because last summer, I was in Napa, and you could still see a lot of that fire damage from a few years prior, you know, both in terms of the vines themselves, but also just in the region and and just how severe some of that was. So, I can imagine that that smoky burnt, ashy, you know, sort of medicinal taint, that’s, um, that’s on that year would not be great. Okay, so as we sit here, approaching the midpoint of 2023, what would you say is the overall state of the bulk wine industry? How would you characterize it right now?

Sandy Mickas 

I mean, I would characterize it as I think the industry is thriving, I think, even though there’s a lot of variation in wine, and you’ll see a lot of analysis, if you follow market, publications and things like that, some will tell you that the volume of wine being sold is going down, which is true, as far as just overall wine being sold. Even though you know, prices are up. So it looks like the industry is growing, even though you know, it’s not growing at the rate they would want. But I still think the industry is thriving, and that it’s you know, very active, there’s a high demand for wine. If you look at the wine that’s available in California and the different regions of California, like bulk wine on the market for sale. You know, Napa, for example, there’s very little Napa Cabernet available for sale, which tells me that, you know, there’s a pretty good demand for it. Because if there wasn’t, obviously there’d be a lot more available. So things like that, I think, are interesting to watch, because we see fluctuations in in the market for bulk wine. And you know, when you get into other regions of California, where they have bulk wine available, you might see a little bit more available. And those prices are much lower than a Napa quality, bulk wine. So it’s interesting because obviously, when there’s no Napa wine available, people are gonna go to other regions Sonoma would be the next best choice. And, you know, and they would go from there. So it’s interesting to follow that because it definitely plays a big part in the industry as far as California bulk wine, because it’s dictating the pricing. And so when there’s none of the higher priced or premium quality, what’s presumed to be premium quality coming out of Napa, then sales moved to the other regions and You know, those don’t have the same price point that the Napa wines can demand. So it sometimes makes the market look like it’s shifting negatively as far as pricing. But that’s really regional, it’s not an indication of what the Napa wines could get. There’s just not a lot of it available. So, you know, things like that definitely have a an impact on what’s happening in the industry. But there’s definitely supply out there. And, you know, we see there’s a lot of activity based on the market publications that we see. So I think that the the wines are doing well, some of the the lower end bulk wine, we see people discounting that and often it’s not purchased, which tells me that there may be a little oversupply in the lower end market. And so, you know, it’s things that we watch, and I follow it pretty closely. There’s some quarterly publications that we watch from Turrentine brokerage that they put out the market pricing and, you know, we find that information to be very helpful. And we do monitor it pretty closely. And we see it also, on the appraisal side, it translates very closely. So it’s interesting to see that what they’re saying is happening is actually happening when you’re speaking with people at the wineries.

Steve Katz 

Sure. You know, it’s interesting also, because we have a lot of lenders who like to listen in on these podcasts, and we hear from them. So, you know, for those lenders who may already be involved in the industry, or those who are getting involved or looking at opportunities in the bulk wine market, do you have some valuation focused diligence thoughts or recommendations that generally you would consider specific to the industry that you’d like to share?

Sandy Mickas 

Sure. So as far as bulk wine specifically, I think there’s some, a few really important things for a lender or prospective lender to understand one, and I would say this is probably the most important is the seasonality aspect of bulk wine. Because all of the grapes are going to be harvested in the fall, it’s late summer into the fall is when the harvest of the grapes is done. So then the wineries are doing their crush, and their fermentation, and then they’re getting the wine into a tank or a barrel to age, usually, by the end of December at the latest usually like November, December is that timeframe. So what’s going to happen is they’re going to see a huge increase in bulk wine from every winery, if they’re, you know, lending to a winery at that time of year. But I think it’s important for them to understand that even though there’s a huge increase of bulk wine at that time, that is brand new wine that’s really not super marketable at that point. I mean, it’s probably marketable to some degree, but certainly not as marketable as it would be six to nine to 18 months from then. So you know, when you have a bulk wine, for example, red wines, on a higher end red wine, it will often age, most wineries will age those for 18 months in barrel. So if you have bulk wine that’s been in the barrel for two months, versus bulk wine that’s been in the barrel for 18 months. You know, that’s a big difference. And so I think it’s important for lenders to understand that once that harvest is done, and the bulk wine is now bulk wine, technically, that doesn’t mean it’s going to have the same value as the bulk wine that’s been aging for a year already. And so that’s one factor that we you know, look at, in depth. Obviously, the market pricing of the California bulk wine and again, I think it’s important to distinguish California here because there’s a specific market pricing that’s done by Turrentine brokerage that’s only for the state of California. So wine or grapes, wine from grapes grown in say, Washington, or Texas or any other place in the United States or anywhere else in the world is not going to be covered under that market pricing. Now there are other publications for worldwide market pricing, you know, such as wine coming out of France or Spain or New Zealand or wherever,  which is Ciotti is another publication for worldwide. But what we’re specifically talking about here is California so I think it’s important for people to understand that if they have a winery that they’re looking at in say this State of Washington where there are many wineries, that is not going to be representative, you can’t use the same market pricing for Washington as you can for California. So I think that’s a one important factor for lenders to know, if they’re following that market pricing. And you know, like, obviously, the aging eyes sort of touched on that. But that’s definitely a factor of how long white wines do not age as long as reds generally speaking. And so, you know, the aging process of a white wine, for example, Chardonnay, or Sauvignon Blanc would be generally up to 12 months generally it wouldn’t be longer than that, often, it’s more six to nine months, just depending. So I think it’s important for lenders to understand what they should expect as far as aging and converting bulk wine into finished wine and how long that process might take. costing methodology is another thing that is important, because wineries who are just buying bulk wine on the open market, you know, they’re just paying a price for that bulk wine, and then they’re gonna blend it and bottle it. And that’s very straightforward, versus estate wineries who are growing all their own grapes, they’re doing their own crushed, they’re doing their own aging, and then doing their own bottling, they often will include all of the costs for the vineyard, and growing and harvesting the grapes will be included in the price of the bulk wine, which, you know, makes sense, you’ve had to do all that work. But it’s sometimes, you know, if they’re not efficient, or the crop yield is very low, that will drive up the price or the cost of their bulk wine versus a bumper year where they have an abundance of bulk wine, then that harvest cost and that, you know, forming costs is spread over much more bulk wine. So that drives the price down. So I guess it’s important for lenders to understand that cost that the company is showing of the bulk wine is not always indicative of what the value will be. Because if the winery isn’t good at controlling their costs, or their costs are excessive, their overhead is excessive. That’s going to be represented in the bulk wine. But that does not mean that you would be able to recover that. And in many cases, we’ve seen wineries who have a very low crop yield have to sell their wine at a loss because they cannot raise their price of the bottled wine in the end to cover all of the costs when the yields are very low.

Steve Katz 

Yeah, sure. That’s not a happy day. Yeah.

Sandy Mickas 

So it’s things like this, that are important. And you know, there are others, obviously, but I would say those are the main points to understand.

Steve Katz 

Yeah, well, there’s a lot there. And it’s obviously a very nuanced industry. And, you know, and and specifically, bulk wine within the overall offerings within the wine industry is specific. I know we’re gonna have you back on soon to talk about case wine, I think so we’ll look forward to that discussion. And really appreciate it very informative. Thanks so much for sharing your your thoughts. Today, Sandy, If listeners have follow up questions, want to discuss clients, or maybe some efforts they’re involved with, how should they get in touch with you? Yeah,

Sandy Mickas 

thank you. I’m happy to be here today. And listeners can feel free to reach out to me my email is smickas@HilcoGlobal.com. So that would be s M I C K A s at Hilco global.com. Or my phone number is 626-622-3237. Where they can feel free to reach out to me on LinkedIn as well.

Steve Katz 

Okay, sounds good. Well, thanks again and listeners. As always, we hope that the smarter perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. And remember that you can check out more great podcasts and articles featuring timely insights from Hilco experts like Sandy, at hilcoglobal.com/smarter-perspectives. And as I said, Sandy would be back on soon to talk about case wine. So until then, for Hilco Global I’m Steve Katz.