THE IMPACT OF WINE, GRAPES AND GRAPE PRODUCTS ON THE AMERICAN ECONOMY

Transcription

1 THE IMPACT OF WINE, GRAPES AND GRAPE PRODUCTS ON THE An Report Preliminary Findings Wine and Winegrapes MARCH 2006 Copyright 2006 by MKF RESEARCH LLC THE WINE BUSINESS CENTER, 899 Adams St., Suite E St. Helena, California 94574, U.S.A. (707) This publication is provided as is, for your information only, without warranty of any kind, either expressed or implied, including, but not limited to, implied warranties of merchantability, fitness for a particular purpose and non-infringement. You assume all risks concerning the suitability and accuracy of the information within this publication. This publication may contain technical inaccuracies or typographical errors. MKF RESEARCH LLC assumes no responsibility for and disclaims all liability for any such inaccuracies, errors or omissions in this publication.

2 is conducting a study of the impact of the entire wine, grape and grape products industry on the US Economy. This report provides conservative preliminary estimates of the impact of the wine and winegrape segment of this industry. Future reports will assess the impact of the remaining components of the grape industry, including juice grapes and juice grape products, table grapes and raisins. This study has been undertaken through the collaborative support of Wine America, the Wine Institute, Winegrape Growers of America and the National Wine and Grape Initiative plus the cooperation of the vintner and grower organizations in Illinois, New York and Virginia and the states of Missouri, North Carolina, and Michigan and Texas Tech University with the overall coordination of the New York Wine and Grape Foundation. The methodology for this study is described on page 14 below. 2

3 FULL ECONOMIC IMPACT OF US WINE AND WINEGRAPES ON THE $ 90 Billion 1 ECONOMIC IMPACT Full-time Equivalent Jobs Wages Paid 514 thousand $ 17.9 billion Number of US Wineries 3,726 Number of Grape Growers 34,130 2 Grape Bearing Acres 606 thousand 3 U.S Winery FOB Revenue Retail and Restaurant Share of Revenue from Sales of US Wine Distributor Share of Revenue from Sales Of US Wine $ 9.1 billion $8.3 billion $2.5 billion Grape Sales $1.9 billion 4 Number of Wine-Related Tourist Visits Estimated Wine-Related Tourism Expenditures 30 million $ 2 billion Federal Taxes Paid $4,321,524,000 State and Local Taxes Paid 5 $4,846,996,000 1 See Sum of Total Spending on page 4. 2 Includes winegrapes, raisins and juice grapes. 3 Excludes table grapes and raisins. 4 Includes juice grapes but not table grapes or raisins. See Appendix III. 5 Underestimate as no data available on property taxes paid by wineries or vineyards. 3

4 Total Economic Impact (Sum of Total Spending) on Wine and Wine Grapes Revenue: Winery Sales $9,116,968,716 Retail and Restaurant Wine Sales $8,364,925,524 Distributors Sales $2,471,290,992 Tourism $2,034,300,000 Glass, Cases, Closures $903,000,000 Federal Tax Revenues $4,321,524,000 State Tax Revenues $4,846,996,000 Vineyard Development (excluding vines) $864,219,000 Wine Labels $147,348,000 Grapevines $42,517,000 Trucking $86,000,000 Charitable Contributions $75,000,000 Stainless Steel Tanks $36,000,000 Winery Research $12,000,000 Indirect (IMPLAN) $18,606,927,883 Induced (IMPLAN) $20,496,812,450 Total Revenue $72,425,829,565 Wages: Winery Employees $1,302,689,000 Vineyard Employees $647,238,000 Tourism $535,612,000 Vineyard Development - Labor $610,000,000 Glass, Cases, Closures $218,000,000 Distributors Employees $396,760,000 Wine Labels $50,000,000 Grapevines/Nurseries $25,560,000 Retail/Liquor Stores - Wine Specific $878,638,800 Restaurant Wages $385,304,475 Trucking $26,000,000 Stainless Steel Tanks $14,000,000 Education and Research $2,662,500 Indirect (IMPLAN) $6,064,524,051 Induced (IMPLAN) $6,725,532,082 Total Wages $17,882,520,908 Total $90,308,350,473 4

5 EXECUTIVE SUMMARY Production of wine and winegrapes and their related industries produced more than $90 billion of economic value to the American economy in 2004, based on preliminary estimates. Wine is one of America s leading value added agricultural products. This figure should be viewed as conservative as further data is being collected, particularly on related industries. The large and growing economic impact of the wine industry is the exact opposite of what is happening in the auto and other industrial sectors. When a company like General Motors closes a plant, all of a sudden its total economic impact becomes painfully apparent with the direct loss of jobs, the loss of business for suppliers, and the loss of spending power and tax bases in the local community. These are the direct, indirect, and induced effects of economic activity in essence, the ripple effect which can be either good or bad. In the case of the wine industry, as this analysis shows, the ripple effects are very positive in many areas of the economy. In addition to its contribution to a vibrant US economy, the wine and winegrape and allied industries paid at least $4.3 billion in Federal taxes and an additional $4.8 billion in state and local taxes in Table 1 Total Taxes, License and Other Fees, 2004 Total Federal Tax $4,321,524,000 Excise Tax $520,532,000 Licenses fees, and other $72,599,000 Other State and Local Tax $4,253,865,000 Total State and Local Taxes $4,846,996,000 Total Taxes, Fees and Licenses Paid $9,168,520,000 Source:, DISCUS and IMPLAN This preliminary report focuses primarily on the wine and wine grape sectors of the industry. However, selected vineyard data in this report employment, and number of growers applies to the growing of all grapes and acreage and grape sales data includes juice grapes as well as winegrapes. Official statistics on a national level do not differentiate among the various types of grapes in reporting this information. 6 IMPLAN, and the Distilled Spirits Council of the United States 5

6 Subsequent reports will consider the full economic impact of the grape juice, table grape and raisin sectors. These products and their many related expenditures on packaging, retailing, distribution and allied industries will add considerably to the total impact of grapes on the American economy. A National Industry of Family-Owned Small Businesses Production of wine and winegrapes is now a national industry, as shown in Appendix II. Wineries can now be found in all fifty states and the District of Columbia. America s wineries and vineyards are overwhelmingly small family-owned enterprises. Revitalization of Rural Communities Wine, winegrapes and allied industries create employment and new market opportunities in rural communities. In areas that previously had diminishing farming of tobacco, cotton, prunes and other crops, the planting of grape vines and the creation of wineries is now offering the areas new life. Grape farming is providing employment as is the establishment of new wineries, crafts shop and restaurants springing up in the footprint of the communities. Grape growing and the establishment of wineries are helping to diversify local economies and keep land in agricultural production as some crops become less viable. For example, in North Carolina 1000 acres of vineyards and 44 new wineries have been established in the last decade as tobacco acreage has declined. By their very nature, wine and grapes are long-term investments and long-term employers: newly planted vineyards need four years to produce a harvest. Another year to three years is needed to turn those grapes into wine. Not only are these long-term investments but they are inherently tied to place : a particular location, soil, landscape and aspect. Unlike manufacturing or service enterprises, vineyards, once planted, cannot simply get up and move to another country which might offer cheaper labor, a better business climate or tax incentives. Wine especially speaks of the soil and climate from which it is drawn. Whether from Michigan, California, New York or North Carolina, wine speaks of its community and its history. 6

7 Employment Wine and grapes and related industries account for more than 514 thousand jobs in the United States, for a payroll of more than $17.9 billion, as shown in Table 2 below. Table 2 Total Employment 2004 Wine, Grapes and Related Sectors Vineyards 34,130 Grapevine/Nurseries 1,064 Vineyard Development Contractors 3032 Agricultural Equipment 1,987 Wineries 31,470 Tourism 24,660 Labels 1,285 Glass, Cases, Closures 3,072 Stainless Steel 225 Distributor 16,475 Trucking 1,900 Retail/Liquor Store 40,500 Restaurants 40,000 Education/Research/Labs 212 Indirect 135,176 Induced 178,819 Total 514,007 Source: and US Department of Labor Moreover, winery employment particularly has been growing even through the recent difficult economic years, as shown in Table 3 below. From 2001 to 2004, reported direct winery employment has grown from 25,363 in full time equivalent jobs to 31,470 full time equivalent jobs and this is an underestimate as owner employment, in these primarily family-owned businesses, and seasonal and occasional labor are not included in these numbers. 7

8 Table 3 Total Winery Employment Year Number of Employees Souce: US Dept of Labor Opportunities and Challenges Opportunities Growing Market for Wine Total wine sales in the United States have grown by nearly 25% since This growing demand for wine derives from a variety of underlying trends among American consumers, including: Demographics: All generational segments are increasing their wine consumption, led by baby boomers. While wine has long been the favored alcoholic beverage among women, men are increasingly joining them in consuming wine. Wine consumption is also increasing across nearly all ethnic groups and regions. Consumer values 7 : Americans are increasingly seeking opportunities to socialize in small groups and at meals, for which wine is particularly suitable. Americans are exploring new product experiences and particularly quality products, for which the diversity and quality of American wines are particularly suitable. Retail patterns: Retailers are responding to this growing interest in wine by expanding the variety, quality and settings of their offerings, although many challenges for wineries still remain in this area. Restaurant patterns: Offering quality and diverse wine has now become a major marketing and business generation tool for America s restaurant industry, which is itself America s largest employer. 7 See Wine Institute Consumer Research Study,

9 Health Effects: A variety of studies suggest that consuming wine in moderate amounts with food may positively affect the well-being of healthy adults. (Demand for other, non-alcoholic, grape products could potentially be affected by this same trend.) Growth of Wine Tourism Wine tourism is driving the growth of the wine industry in many regions of the country, providing a major economic stimulus to weakened rural economies and maintaining agricultural traditions and quality of life. There has been a dramatic increase in destination wineries and wine trails as visitors discover the wineries and wine regions in their state, the surrounding states and across the country. States and counties are increasingly partnering with wineries to promote this tourism for the regional recognition it presents and for the economic benefits it provides. With only partial data currently available, it is estimated that at least 30 million winery visits currently take place and that winery tourism provides employment to 24,660 persons. In 2002 California had approximately 14.8 million such visitors with an estimated revenue impact of $1.3 billion. In 2004, New York had 4.1 million visits and revenue impact estimated at $312 million and Michigan had 1 million visitors and a revenue impact estimated to be $26 million. Wine-related events, from auctions to festivals to winemaker dinners, have also become a highly successful means of raising funds for good causes, supplemented by the generosity of the industry itself. By a highly conservative estimate, at least $72 million was raised or contributed to charities in 2004 through the wine community. Unfortunately, too many regions do not currently track the number of visitors to their wineries or regional visitors drawn by winery visits. In addition, data was not yet available for a variety of other wine related events such as festivals, wine trail programs and winemakers dinners. Growing Export Potential American wine has shown growing potential in export markets, with sales growing from $541 million in 2001 to $794 million in

10 Table 5 U.S. Wine Exports Year Volume (in millions) Value (in millions of dollars) Gallons Revenues to Wineries $ $ $ $541 U.S. Department of Commerce. USA Trade Online Challenges However, domestic wine s share of the US market declined from 81.6% to 75.4% from 1999 to 2004, finally stabilizing in A 2004 study estimated that a 10 point loss of market share could cost nearly $5 billion in overall economic impact. To regain its share of this growing market, continuing investment in quality and value as well as further opportunities to access the consumer market are needed by the American wine industry. Access to Market Alcoholic beverages are the only industry in America with their own constitutional amendment. The 21st amendment which signaled the end of prohibition in the US led to a series of complex regulations and structures which vary by state for the sale of wine, otherwise known as the three-tier system : wineries sell to licensed distributors which then sell to retail or restaurant outlets. Distributors are licensed by both the Alcohol and Tobacco Tax and Trade Bureau (TTB) of the US Treasury Department and by the respective states. While there are some 7000 distributors in the US, there are no national distributors. Moreover, consolidation in the industry has reduced the number of licensed distributors by more than 50% in the last decade. Fewer than 25% of wineries have access to licensed wine distributors. Relatively few small wineries which represent the vast majority of US wineries have access to distributors or succeed in selling significant volume through this system. Distribution businesses are capital-intensive enterprises that depend on scale and volume to earn a profit. The lack of interest by professional distributors may be understandable, given the economics of the distribution industry, their high infrastructure costs and the vast number of small wine brands. 10

11 How then can America s small wineries sell their product, for which there is often more than adequate demand? The vast majority of the small wineries in the US sell all or almost all of their wine directly from the winery to consumers, either tourists visiting a tasting room or farmers market or to the members of their wine clubs and mailing lists. Many wineries lacking distributors also market their own wines directly to local retailers and restaurants. Presence in restaurants is often essential to allow consumers to become familiar with a brand. Sales through the three-tier system usually double the winery FOB price of the product, to cover the cost of distributor and retailer markups. Unless they significantly increase the price of their wines sold through these channels, the wineries need to absorb these costs as a loss of revenue. Few small wineries are in position to afford either tactic, particularly in America s emerging wine regions, where wines are often modestly priced as they build their reputation and quality. Thus, maintaining winery direct to consumer and self-distribution is critical to the survival of America s small wineries and to these efforts to revitalize many struggling rural communities. Although the smaller wineries represent the vast majority of America s wineries by number, because of their small production their sales represent only a modest share of total U.S. sales of U.S. wine. Thus, allowing direct sales and self-distribution is not significantly disruptive to the three-tier system, as shown in Table 6 below. Table Revenue of US Wine by Channel Total Winery Revenue $9,116,968,715 of which: Estimated share through 3-tier system $8,202,769,975 Estimated share through Self Distribution and Direct to Consumer $914,198,741 Wholesaler Revenue $2,471,290,992 Total Off-Premise Incremental Revenue $4,048,060,748 Total On-Premise Incremental Revenue $4,316,864,777 Total Sales of US Wine $19,953,185,233 Source: Recent changes in laws and regulation offer these wineries the opportunity to build markets through these channels but these opportunities remain under dispute in several states. Loss of direct sales access by these wineries would quite directly end their businesses and undermine the growth of the wine and winegrape industry in much of the U.S. 11

12 In addition, several states have limited potential retail outlets for wine. In 36 states wine may be sold in food stores wine is, after all, meant to be consumed with food. However, 14 states prohibit the sale of wine in such outlets, 11 8 of which limit the sale to a small number of specialized liquor retailers reducing access to the consumer, particularly for small producers. Grape Shortage Shortage of quality grapes also remains an issue for wineries in emerging wine regions, as demand for the best grapes outstrips their supply. This situation is exacerbated by the challenges of learning to grow new crops in new locations as growers develop the ability to satisfy the need for quality fruit. Scarcity of Financing Wineries and vineyards have particularly intense capital and credit requirements, reflecting the unusual time flow of costs and revenues. Vineyard planting costs may run from $15,000 to $35,000 per acre, depending on region, grapes and planting pattern. The first saleable crop does not generally appear until the third or fourth year after planting. Revenue may not be earned from wine sales, depending on aging practice, for another one to three years. In addition, the industry faces the usual agricultural risks from weather, disease and pests to which are added the peculiarities and costs of selling what is essentially a discretionary consumer product. Relatively few credit and other financial institutions understand the business of wine and winegrapes and are comfortable with its financial requirements. Consequently, both growers and wineries in many parts of the country have difficulty securing adequate financing for their operations. Scarcity of Trained Labor and Availability of Training America s wine and winegrape industry is experiencing a serious shortage of trained viticulture professionals, a shortage which has constrained the continued expansion of the wine and winegrape industry as well as its continuing efforts to improve quality. Several states, including New York and North Carolina, have recently initiated or expanded their Enology and Viticulture programs and are strengthening their viticulture extension and research services. However, still more such programs are required as well as extensive in-service, part-time courses for mid-career professionals to continue to improve their skills. Continuing to build this 8 Three states permit wine sales in drug stores, including chains, but not food stores. 12

13 institutional infrastructure will help ensure the long-term strength of the American wine and grape industry. Growing need for viticulture and enology research and education The growth of viticulture and enology research and education resources has not kept pace with the expansion of this industry across the country. As can be seen in the Summary Table on page 4, the disparity between the scale of research and education funding and the scale of the overall industry is particularly startling. While state funding for viticulture and enology research and education has been increasing or at least requested, substantial additional funds are needed to allow for the consistent growth in quality and value to ensure American wine and viticulture remains competitive. 13

14 METHODOLOGY Data Collection Data for this study is being collected from a variety of public sources supplemented by primary research with wineries, suppliers, growers and other economic entities and supported by a variety of studies undertaken by industry and professional organizations. Where actual primary census or public data was not available for this preliminary report, actual data collected from primary and secondary sources for several constituent studies, such as the Economic Impact of California Wine 2004 and the Economic Impact of Wine, Winegrapes and Grape Juice in New York State 2005, both conducted by, and similar studies conducted for Oregon or underway for Colorado, were used. Thus, for several data items the numbers provided are only partial and therefore are considered conservative. Direct, Indirect and Induced Effects (IMPLAN) The wine and grape industry has ripple effects the United States economy. Economic impact studies estimate the impact of an industry in a defined geographic region by identifying and measuring specific concrete and economic events, such as the purchase of goods and services. IMPLAN is the acronym for IMpact analysis for PLANing. IMPLAN is a well established and widely used economic model that uses input-output analyses and tables for over 500 industries to estimate regional and industry-specific economic impacts of a specific industry. The IMPLAN model and methodology classifies these effects into three categories, Direct Effects, Indirect Effects and Induced Effects. Direct Effects are economic changes in industries directly associated with the product s final demand. Thus, direct effects consider the direct employment and spending of wineries, vineyards, distributors and immediately allied industries. Indirect effects are economic changes income created through job creation in industries that supply goods and services to the directly affected industries noted above. For example, the purchases of electricity and gasoline by wineries and of cash registers purchased for a tasting room. 14

15 Induced effects are the effects of these new workers spending their new incomes, creating a still further flow of income in their communities and a flow of new jobs and services. Examples are spending in grocery and retail stores, medical offices, insurance companies, and other non-wine and grape related industries. COMPARISON OF STATE AND NATIONAL STUDY It is important to keep in mind, when comparing this study with, for example, the California and New York State studies, that this analysis includes the impact of the sale of wine direct and by distributors at retail and restaurant levels in all fifty states, as well as suppliers which may be based in all parts of the country, while the state studies considered only the sale of the state s wine within the state and allied industries based in that state. The sale of these beverages generates substantial revenue and employs thousands of people across the United States. 15

16 Appendix I Number of Bonded, Non-Bonded and Total US Wineries State 2004 Total 2004 % Total 2005 Total 2005 % Total Difference % Growth California 2, % 2, % % Washington % % % Oregon % % % New York % % % Pennsylvania % % % Texas % % % Virginia % % % Ohio % % % Michigan % % % Colorado % % % Illinois % % % Missouri % % % North Carolina % % % New Jersey % % % Iowa % % % Indiana % % % Florida % % % Idaho % % % Wisconsin % % % New Mexico % % % Maryland % % % Oklahoma % % % Tennessee % % % Connecticut % % % Kentucky % % % Arizona % % % Georgia % % % Massachusetts % % % Minnesota % % % Nebraska % % % West Virginia % % % Kansas % % % Montana % % % Utah % % % Louisianna % % % Maine % % % Rhode Island % % % South Dakota % % % Alabama % % % Nevada % % % New Hampshire % % % Vermont % % (1) % Alaska % % % Hawaii % % (1) % South Carolina % % % Arkansas % % (1) % Mississippi % % % North Dakota % % % Wyoming % % % DC % % % Delaware % % % TOTAL 4,740 5, % 16

17 Appendix II State Grape Bearing Acreage * & Type AZ 2,400 2,100 1,000 AR 1,200 1, CA wine 486, , ,000 GA 1,100 1,100 1,100 MI 12,300 13,200 13,900 MO ,000 NY 31,000 31,000 31,000 NC ,100 OH 2,000 2,100 2,100 OR 9,400 10,700 11,100 PA 12,000 12,000 12,000 TX 2,900 2,900 2,900 VA 1,900 1,900 1,900 WA all types 52,000 52,000 53,000 United States 563, , ,000 Source: USDA, NASS (National Agricultural Statistical Service) and *Less California Table Grapes and Raisins 17

18 Appendix III State Value of Utilzed Production* & Type (1,000 Dollars) AZ 7,953 8,204 1,335 AR 2,147 1, CA wine 1,683,452 1,542,876 1,604,925 GA 2,936 2,738 3,724 MI 14,760 24,830 18,740 MO ,374 NY 46,950 35,815 30,064 NC ,366 OH 2,309 2,685 2,208 OR 32,340 36,240 32,204 PA 15,615 16,419 21,818 TX 4,004 5,220 7,812 VA 6,075 4,420 4,420 WA all types 134, , ,455 United States 1,958,103 1,835,072 1,861,800 Source: USDA, NASS (National Agricultural Statistical Service) and *Less California Table Grapes and Raisins 18

19 ABOUT MKF RESEARCH LLC is the leading research source on the U.S. wine industry. conducts original research on the wine business and wine market trends, publishes a number of industry economic studies and provides business advisory services and market and industry research for individual companies and investors in the wine industry on a consulting basis. The mission of MKF Research is to help our clients make confident decisions that improve their business performance and help them attain their goals. Visit our website at to learn more about what we do. LLC is jointly owned by Global Wine Partners US, LLC and Frank, Rimerman + Co., LLP, CPAs. Global Wine Partners, The Global Wine Investment Bank, with offices in Napa, Paris and Sydney, is the only investment bank dedicated exclusively to the wine industry. Frank, Rimerman + Co. LLP, founded in 1949, is the largest, locally-owned provider of accounting and consulting services in northern California. With offices in San Jose, Palo Alto, San Francisco and St. Helena and over 150 professionals, Frank, Rimerman + Co. offers strategic business and information consulting services, tax consulting and planning, audit and financial reporting, accounting services, litigation and valuation services. Frank, Rimerman + Co. LLP, acquired Motto Kryla Fisher, the CPA services practice of MKF Group, in September The unit, now called MKF Frank, Rimerman + Co., continues to build its wine industry practice (based in St. Helena), committing the full resources of this major professional services firm to the industry. 19