Washington Wine Takes Another Blow

Washington's wine industry is in crisis after a meeting last month in which Ste Michelle Wine Estates, the state's largest winery, told growers it would buy 40 percent fewer grapes than the year before.

The meeting took place July 12 in Prosser in eastern Washington, but was not reported until Sean Sullivan at Northwest Wine Report broke the news today. SMWE confirmed the news in an email to Wine-Searcher.

"We are currently working with our grower partners in Eastern Washington to adjust our grape supply to better align with demand and enable us to focus on crafting the highest quality premium wines from Washington," said Lynda Eller, SMWE senior director of communications. "Our long-term relationships with our growers are extremely important to us, and while this is a difficult process, these proactive measures are necessary for the ongoing health of our business as well as the health of the overall Washington wine industry."

This will be calamitous for many growers. SMWE, parent company of Chateau Ste Michelle, built up and supported a network of independent farmers for years. But if CSM doesn't want their grapes, there won't be a huge market for them elsewhere.

The Washington Wine Commission said last year that the state has about 60,000 acres of grapes. Sullivan reported that SMWE contracted for 35,000 acres as recently as 2017 but more recently was down to 28,000. A 40 percent reduction would thus mean cutting off farmers of more than 11,000 acres of grapes.

Vicky Scharlau, executive director of the Washington Winegrowers Association, told Wine-Searcher that for the health of the industry, 10,000 acres of vines need to be removed.

To put that in perspective: Washington grows about as many grapes as Sonoma County, but is being asked to remove as many as are in the entire Dry Creek Valley AVA. And unlike in Europe, there is no government support for farmers who have to remove vines.

"We’re encouraging growers to review each vineyard block carefully and critically to remove vineyards with diseased vines, planted in suboptimal areas, or with marginal production," Scharlau said.

She also said that some farmers had already been diversifying as CSM continues to downsize. Grapes are only Washington's ninth largest cash crop, according to the Washington State Department of Agriculture. But most of the top eight – apples, milk, cattle, wheat, potatoes, hay, hops and cherries – don't produce as much money per acre.

In 2021, SMWE was sold for $1.2 billion by its owner, the tobacco company Altria, to Sycamore Partners, a New York-based private equity firm with no previous wine experience. Sycamore is a brand-turnaround specialist that mostly owns previously distressed fashion brands like Lane Bryant, Aéropostale and Nine West. And at the time of the sale, SMWE was a distressed brand.

For a long time, no winery in North America made better $10 wines than Chateau Ste Michelle. At one time CSM was the world's largest producer of Riesling, and it also had successful affordable lines of Cabernet, Merlot, Chardonnay, you name it.

Ted Baseler was the last CEO of a grower-friendly company that saw increasing the fortunes of the entire state industry as nearly as important as its own. Under Baseler, CSM loaned equipment and expertise, and even bought grapes it didn't have a place for.

But Baseler retired in 2018, and Americans fell out of love with $10 wines. No company has been hit harder by this than CSM. SMWE reported a $360 million loss in 2020, the year before it was sold.

"What is happening in Washington state should be seen as an extreme case of what's going on in many parts of the wine world including California and France, especially Bordeaux," said Mike Veseth, an economics professor who blogs as The Wine Economist.

"Thousands of acres of vines will need to be grubbed up before supply-demand balance is achieved. Every case is different, but in Washington state much of the industry evolved to provide large volumes of wine at what were the sweet spot price points just a few years ago. CSM prospered making wines that competed very well in the $9-$11 range. But that's not where the market is now, so CSM and the many growers who relied on them are stuck. They aren't alone, but that fact is cold comfort."

On the bright side, if CSM had cut off farmers like this back in 2017, when it bought nearly 60 percent of all grapes in the state, it would have been an existential threat to the entire state wine industry. CSM's six years of shrinking brought it down to about 45 percent of the state's grape crop, which at least means half of the state's grapes were already going somewhere else.

I suggested to Scharlau that this cutback is just Sycamore doing what private-equity firms do: downsizing and slashing expenses. But Scharlau doesn't blame SMWE or Sycamore. As Veseth said, it's not just a Washington problem: wine associations around the world, including in quality regions like the Rhône Valley in France and Rioja in Spain, have reported large inventories of unsold wine this year.

"This isn’t a SMWE problem. This is a wine industry challenge," Scharlau said. "Our market is changing. Wine drinkers are changing. Competition is massive. The channels are shrinking. Shift is on us and now we must pivot. Growers understand that agriculture is cyclical. This is supply and demand up close. We’re known for our creativity. Plus, our next generation of Washington vintners is impressive."

As for CSM, Veseth said he believes Sycamore can turn it around, though the end result might not be recognizable to former fans of the company.

"I have no idea where CSM is headed, but my gut feeling is that Sycamore might choose to spin off some of their premium brands, which fit the current market very well," Veseth told Wine Searcher.

"That's what a company like Sycamore does, trade in brands. They have already sold some of their California assets to the Antinori family. A smaller, more focused, profitable CSM could be very attractive to private equity investors. I am very sorry for the growers involved in this because they have made huge investments in capacity and now see the value of their vineyards evaporate.

"It would be great if someone could step in now and take up the slack that CSM has created the way that Peter Lehmann did in Australia's Barossa Valley in 1980. But I don't know who has the resources and commitment to do that."

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