The Napa Valley is just 30 miles long and only a few miles wide at its broadest point. The Napa appellation is one-eighth the size of Bordeaux, and its vineyards account for just 4 percent of the California wine grape crop. Yet the region stands at the pinnacle of the wine world, commanding prices commensurate with its lofty reputation, and after blockbuster vintages in 2012, 2013 and 2014, its renown is greater than ever. “What’s happening now in Napa Valley is unprecedented,” says Kyle Meyer, president and director of purchasing at the Santa Ana, California–based store Wine Exchange. “We’ve been in this business for four decades, and we’ve never seen anything like this.”
A journey into Napa wine country begins 50 miles northeast of San Francisco in the sub-appellation of Los Carneros, where cool winds from San Pablo Bay create ideal conditions for Chardonnay and Pinot Noir. The route then stretches up-valley, where lush vineyards are sheltered by the Mayacamas mountains to the west and the Vaca range to the east. From its northern crown at Mount St. Helena, the valley is bisected by the Napa River, which flows down to San Pablo Bay. Vines flourish on the fertile valley floor, on the rich benchlands above the alluvial plain and in thinner soils on the mountain slopes. At night, fog moves up the valley from the bay, then burns away in the morning. The mountainside vines remain high above the mist, warming in the California sunlight.
Those conditions create an array of micro-climates throughout the region and a diversity that contrasts with the somewhat monolithic reputation of its wines. The Napa Valley American Viticultural Area (AVA) in fact contains 16 “nested” or sub-AVAs. They include Los Carneros at sea level, the valley floor and benchland estates in Yountville, Rutherford, Oakville and Stag’s Leap, and the mountain vineyards of Atlas Peak, Howell Mountain and Mount Veeder, where the vines are planted at elevations as high as 2,600 feet. In all, it’s a rich palette of soils, subclimates and grape varieties producing a wealth of expressions.
King Cabernet
Although its vineyards flourish with most prominent grape types, the Napa Valley is increasingly dominated by one varietal: Cabernet Sauvignon. In 2000, Cabernet comprised 31.3 percent of Napa’s total wine grape crush, followed by Chardonnay at 21 percent and Merlot at 20 percent. By 2015, Cabernet’s share reached 43 percent, while Chardonnay dropped to 17 percent and Merlot fell to 11 percent. According to the Napa Valley Vintners trade group, Cabernet today accounts for 55 percent of the Napa AVA’s crop value—and its star is still rising.
“New plantings will come online within the next 36 months, and many areas previously not planted to Cabernet Sauvignon are now Cabernet vineyards,” notes John Conover, partner and general manager of PlumpJack Winery in Oakville, as well as PlumpJack’sOdette Estate in the Stags Leap AVA, its Cade Estate on Howell Mountain, and a vineyard and winery recently acquired from Ladera Vineyards, also on Howell Mountain. “With prices skyrocketing, other Napa varieties are being ripped out,” notes Wine Exchange’s Meyer. “Real estate is simply becoming too expensive for growers to keep anything but Cabernet or other Bordeaux varietals in the ground.”
Rising costs, meanwhile, have led to dramatically higher wine prices—particularly at the luxury tier. “Cabernet grapes in Napa currently cost roughly $6,000 a ton,” Conover says. “For an economically reasonable business, grapes should comprise about 23 percent of a wine’s cost. At $6,000 a ton, that equates to a $60 bottle of Cabernet. On Howell Mountain, we pay $10,000 to $13,000 a ton.” He notes that grower Andy Beckstoffer sells grapes from Oakville’s famous To Kalon vineyard for $40,000 to $50,000 a ton. “At that price, you’re looking at a $500 bottle of wine,” Conover says. “That’s Napa’s supply-and-demand situation today.”
Prices notwithstanding, demand for top-end Napa Cabernet continues to soar. “The luxury Cabs will become more expensive and harder to obtain,” says Veronica Litton, wine buyer at Crown Wine and Spirits, the 13-unit chain based in Fort Lauderdale, Florida. “Customers are willing to pay. The only issue is supply—not price.”
Indeed, getting sufficient inventory has become a major headache for traditional retailers, and that’s not solely due to demand. It’s also because Napa continues to move toward the direct sales model, which is far more profitable for wineries than the three-tier system, but leaves less supply for retailers. “It’s gone from about 25-percent winery-direct sales in the early 1990s to about 60 percent today for the average Napa winery, though of course the larger producers do a lower percentage of direct sales,” says Rob McMillan, executive vice president and founder of the wine division at Silicon Valley Bank.
Top luxury Cabernets like Harlan Estate, Bryant Family and Colgin have always been available in the tiniest of allocations, but that scenario is now playing out more broadly, and many retailers are feeling left out of the boom. “We get enough mainstream Napa wines, but it’s a different story with the most desirable ones,” says Charles Sonnenberg, owner of the three-unit Frugal Macdoogal Wine & Liquor Warehouse in Nashville, Tennessee. “So many of them are now being sold direct—none of that allocation filters down to us.”
Although Sonnenberg has accepted this reality, he does see consequences. “Napa’s winemakers were once all too happy to sell us their wine, but as the industry has matured and desirable Napa properties are now in short supply, our calls aren’t returned,” he says. “So we certainly feel abused. Retailers now have no incentive to promote Napa because many of its jewels aren’t available. We want to work with people who are more of a partner to us.”
“Every year, it’s a fight for allocations,” says Ed Sands, owner of Calvert Woodley in Washington, D.C. “The top wineries are holding back more than ever for their private customers, which I don’t think is a good thing. They’re also doing multiple releases like they do in Bordeaux, with a first and second tranche.”
With the 2013 vintage hitting the market, allocation worries have risen. “The 2013 Napa Cabs are exquisite,” Crown’s Litton says. “But if I don’t have enough of them, it will be a huge problem with my customers. In previous years, I’ve had no problem getting Silver Oak, for example. But I haven’t received it recently, and those stock issues are occurring across the board.”
Some retailers are seeking out Napa’s emerging luxury players as alternatives. “Starting with the 2012 Cabernet Sauvignons, we began focusing on new producers like Hourglass Estate and O’Shaughnessy Estate, which got scores in the mid-90s,” says Joseph Tedesco, wine department manager at Hazel’s Beverage World in Boulder, Colorado. “Those brands run from $80 to $200 a 750-ml. bottle. Limitations on the better-known labels have prompted us to seek other options.”
Price-Friendly Napa
Meanwhile, retailers remain focused on other Napa wines they can obtain. “We’ve all had to face the fact that there’s a lot more money in selling direct and cutting out the retailer, but Napa has some beautiful wines at more normal retail price points,” says Saurabh Abrol, president and CEO of the four-unit New Jersey retail chain Wine Chateau. Abrol cites Cabernets from Stags’ Leap Winery ($39.97 a 750-ml. bottle), Sequoia Grove ($39.97) and Sanctuary ($27.97). “We have enormous success with those offerings, among others,” he says. Further down the scale are Napa Cellars ($20) and Franciscan Estate ($21.99).
Among Crown’s top-selling Napa labels at $20, Litton cites Stratton Lummis The Riddler ($19.99 a 750-ml. bottle), a red blend from Napa négoçiant Row Eleven Wine Co. “That’s been one of our top-moving items for several years,” she says. At the three-location K&L Wine Merchants in California, co-owner and chief wine buyer Clyde Beffa cites Von Strasser Rudy Cabernet Sauvignon ($20), Jax Vineyards Y3 Taureau red blend ($19.99) and Route Stock Cabernet Sauvignon ($17.99) as some price-friendly examples. Tedesco of Hazel’s says The Prisoner red blend ($39.98) is his top-seller in the $40-and-under range.
“Napa Valley Cabernets below $20 do very well for us, including labels like BV Napa Valley and Beringer Knights Valley,” says Annette Alvarez-Peters, assistant general merchandise manager for beverage alcohol at Costco Wholesale. “Above $20, we’ve found the best success with Stags’ Leap Winery, BV Rutherford and Stag’s Leap Wine Cellars Artemis.”
And even amid sky-high grape prices, Napa’s private-label business continues to thrive. At Florida retail chain ABC Fine Wine & Spirits, private-label wines from Napa have been profitable. “The private-label business has gone high-end,” says ABC executive vice president Jess Bailes. “Our Block Wine series, priced around $16 to $23 a bottle, is very successful.” ABC will buy 3,000 to 4,000 gallons of Napa Valley Cabernet from wineries with extra juice. “We label it as a uniquely numbered block and sell it at 20 percent to 30 percent below the normal price of a branded wine of that quality,” Bailes says.
Costco’s Kirkland Signature private label has found success with Napa wines as well. “We’re very pleased with the quality,” Alvarez-Peters says. “We carry eight Napa appellation wines in rotation with prices ranging from $10.99 for a Napa County Cabernet to $19.99 for a Napa Valley Cabernet. Sales have been growing every year.”
Among Napa’s white wines, Chardonnay continues to rule, with nearly twice the volume of its nearest competitor, Sauvignon Blanc. According to Nielsen, The Hess Collection’s Napa Valley Chardonnay ($22 a 750-ml. bottle) was up 21 percent in the year through this past June. “We’re shipping around 24,000 cases, all estate-sourced from our Su’skol vineyard,” says Hess chief marketing officer Nicole Carter. At K&L, Chardonnay sales are led by Rombauer ($34 a 750-ml. bottle) and Beringer Private Reserve ($29.99). And amid the long-term move toward less oaky, more fruit-driven Chardonnays, some retailers see a counter-trend. “The buttery Chardonnays are in big demand,” says Tedesco of Hazel’s, citing Napa-based Bread & Butter. The brand uses grapes sourced from both Napa and Monterey. “I’m seeing consumers go back to that style,” he adds.
Among Sauvignon Blancs, K&L’s Beffa says his top Napa sellers are Cakebread ($26 a 750-ml. bottle), Groth ($18) and Duckhorn ($28). But Napa Sauvignon Blanc isn’t encroaching on Chardonnay’s dominance. “When people think about Sauvignon Blanc, they think New Zealand,” Wine Chateau’s Abrol notes. Sands of Calvert Woodley thinks Sauvignon Blanc bumps up too much against Chardonnay’s pricing. “Our Sauvignon Blanc sales have increased a lot in the last several years,” he says. “But when pricing on a winery’s Chardonnay and Sauvignon Blanc get too similar—which happens fairly often—consumers generally go with Chardonnay.”
Acquisition Moves
Amid Napa Valley’s current boom, deal-making has been in full swing. The biggest recent transaction was the $600 million purchase of Diageo’s wine holdings by Treasury Wine Estates (TWE), finalized earlier this year. In that deal, TWE gained Beaulieu Vineyards, Sterling Vineyards, Acacia, Hewitt and Provenance, which join the company’s Napa portfolio of Beringer, Stags’ Leap and Etude. “Through a combination of our own vineyards and leases, we now have access to more Napa acreage than any other supplier,” notes TWE vice president of marketing Barry Sheridan.
In line with the Diageo deal, TWE recently launched a two-year, $50 million investment in its U.S. wineries, with a further $42 million to be spent on upgrading its vineyards. At Sterling’s hillside estate, luxury winemaking will be centered in a remodeled facility located at the top of the property. A similar model is being implemented at Beaulieu Vineyard (BV), where winemaking for Georges de Latour, Tapestry and small-lot wines is being modernized. Sterling and BV labels priced above $20 but below the luxury tier will be made at a new winery within Beringer’s existing facility in St. Helena, as will Acacia Carneros and A by Acacia.
E. & J. Gallo Winery also has been quietly on the move in Napa Valley, buying vineyards and boosting production capacity. Last December, it acquired The Ranch, a custom-crush facility and winery in St. Helena with a 30,000-ton grape crush capacity, bottling capacity of 4.6 million cases and storage space of 8 million gallons. The deal tripled Gallo’s capacity in Napa Valley, adding to the combined 15,000 tons of its Louis M. Martini and William Hill wineries.
Roger Nabedian, senior vice president of Gallo’s premium wine division, called the purchase of The Ranch a “once-in-a-lifetime opportunity.” It’s also an ideal platform for Gallo’s Napa expansion, and that strategy became clearer with the June acquisition of St. Helena–based Orin Swift Cellars from winemaker Dave Phinney. Phinney is best known as the creator of The Prisoner, which Huneeus Vintners acquired in 2009 for $40 million and sold to Constellation Brands earlier this year for $285 million. Orin Swift’s annual volume is at around 100,000 cases. Known for its compelling, contemporary packaging, the brand’s portfolio of highly regarded wines features 11 labels, four of them with Napa appellations. With Gallo’s resources and Phinney’s winemaking skills, the Orin Swift portfolio looks ripe for major expansion.
Elsewhere, vintners are busy upgrading their vineyard holdings and upscaling their wines. Duckhorn Wine Co.—acquired in August by TSG Consumer Partners—last year gained ownership of the famed Three Palms vineyard, one of Napa’s top Merlot properties. Duckhorn Merlot and Decoy Merlot are both hitting double-digit growth, according to Duckhorn president and CEO Alex Ryan. Paraduxx Proprietary Napa Valley red wine ($48 a 750-ml. bottle), meanwhile, has been reconfigured. “We’ve transitioned the three-tier Paraduxx from being Zinfandel-dominant to Cabernet-dominant, while keeping the price at $48,” Ryan says. “Paraduxx has been showing 25-percent depletions growth with a healthy channel mix, weighted to the on-premise.”
Charles Krug, which produces about 85,000 cases annually, has also been investing in its vineyards and winemaking. Proprietor Peter Mondavi Jr. notes that the Napa Valley estate-bottled Cabernet Sauvignon ($30 a 750-ml. bottle) accounts for about half of the company’s volume, but the ambition is to grow its Reserve line—including the Family Reserve Generations Bordeaux blend ($60), Family Reserve Howell Mountain Cabernet Sauvignon ($75) and Vintage Selection Cabernet Sauvignon ($100).
The Hess Collection, meanwhile is unveiling the 2013 vintage of The Lion Cabernet Sauvignon ($175 a 750-ml. bottle), its first release since the 2008 vintage. After that year, Hess underwent a major revamp of its Mount Veeder vineyards. The 2015 The Lioness Chardonnay ($60) will join the lineup next spring. This month, Hess is releasing The Lion Tamer ($40), a Malbec-led blend that targets the retail channel. It joins Allomi Cabernet Sauvignon ($32), which was up 32.8 percent by value in Nielsen channels in the year through June and is now at about 50,000 cases. Initial production for The Lion Tamer is 2,800 cases, but Hess has big ambitions for the label. “The long-term goal is for The Lion Tamer to be a running mate with Allomi and our Napa Valley Chardonnay ($22),” Carter says.
Experiential Millennials
Amid such remarkable success, Napa’s winemakers remain firmly focused on the future. One concern is the on-premise, where cocktails and craft beer have eaten into sales, particularly among millennials. Yet Conover of PlumpJack is unworried. “Millennials understand the value of an artisanal beverage, and they’re willing to pay a premium for it,” he says. “I’m very optimistic they’ll be our customers at some point.”
In that vein, Napa is making an effort to focus on experiential marketing with its wine tourism. “Wineries are getting away from the cattle-call, stand-up bar experience,” says president Dan Leese of V2 Wine Group. The company handles Merryvale Winery and Starmont Winery & Vineyards, as well as Los Carneros’ Bouchaine Vineyards. “They’re now offering high-end food pairings and various levels of tours, with prices to match,” Leese explains. “It’s also a terrific opportunity to sell the top-tier wines.” Charles Krug recently completed a $7 million hospitality center, aiming to build direct-to-consumer sales, which account for about 7 percent by volume and 15 percent by value. Other big components include library wines and anniversary celebrations, such as one for Robert Mondavi Winery’s 50th anniversary this summer.
“Napa’s wine tourism today is aspirational and experiential,” Conover says. “At our wineries, visitors can meet the winemaker and walk the vineyards, rather than just showing up, buying a highly rated wine and cellaring it for years. That’s yet another reason why it’s an exciting time to be in Napa.”
Additional reporting by Carol Ward