The Big Spill

The sun is setting behind Château Pontet-Canet as Alfred Tesseron finishes his tour of the property, perched above the legendary Bordeaux wine village of Pauillac. He has talked proudly about how his father bought the château 30 years ago, but points out some of his recent investments: a water-recycling system, the new storage and bottling barn, and the twin rows of conical fermentation vats. Now comes the moment of truth.

Standing in his refurbished tasting room, he picks up a glass of the 2005 vintage, sniffs, sips and sucks the wine noisily through his teeth before spitting it out into a gleaming ceramic basin. He looks up quizzically, but he already knows the answer. It’s good. It’s so good, in fact, that long before he starts to bottle it, the wine is already being traded for more than $60 a bottle. That’s double the price his 2004 wine fetched and 75% higher than the spectacular 2000 vintage, the best in recent memory. “If you have a wine that’s in demand, you can sell it,” he shrugs.

In the village of Margueron, an hour’s drive to the east, at Jean Charles’ winery just behind the medieval church, the picture couldn’t be more different. Charles usually sells his entire output to a local merchant, who bottles and markets it for him. But this year, for the first time, the merchant won’t touch the stuff. Stainless-steel vats are filled with thousands of gallons of Cabernet Sauvignon and Merlot from last year’s harvest that Charles is frantic to sell at any price to make room for this year’s crop. Charles, 58, stands in his courtyard, surrounded by clucking hens, and struggles for words to describe his predicament. “It’s never happened before,” he says, gripping a wrench. “This year’s a complete catastrophe.”

The contrasting fortunes of both men are two sides of the same story: a long-overdue shakeout in the cosseted world of French winemaking. France is the superpower of wine, the largest producer and heaviest drinker. But for more than a decade, it has sleepwalked as globalization transformed the business, bringing with it new markets and new competitors. Producers from Australia, New Zealand, California, South Africa, Chile and elsewhere have launched massive–and often brilliantly executed–campaigns to promote their wines across the planet. They have ramped up production and introduced a new generation of consumers to inexpensive, fruity wines with labels that are easy to understand, and, in the process, run off with a colossal amount of business.

A decade ago, France exported three times as much wine as all the so-called New World producers combined. Today France has been overtaken and sells about 15% less than they do. The pummeling is especially bruising on home turf: Europe now imports almost as much wine as it exports. In Britain alone–one of the biggest markets anywhere–the Australians have gone from exotic afterthought to undisputed market leader in a few years. In the U.S., the Australians outsell the French 3 to 1 and have put some California wineries to the sword too.

The French barely reacted to those seismic shifts, largely because global wine consumption has been growing, up about 10% in the past decade, to 240 million hectoliters annually. But now there’s a rude awakening. So many countries have got into the winemaking business like Turkey, China, Brazil–that the world is currently awash in the stuff. In 2004 worldwide production hit its highest level in 20 years, almost 300 million hectoliters, or 15% more than the previous year. The glut is hurting producers everywhere, particularly in Australia, which has surplus wine stocks that exceed a year’s worth of exports. Many grape growers there simply let this year’s crop rot on the vine rather than harvest it.

In France a massive support system overseen by the state is cushioning the impact somewhat. Even so, sales and incomes have been dropping since 2002, and many producers are under pressure. The result is a growing stratification: good winemakers are investing heavily to get better; bad winemakers are facing the prospect of being squeezed out; and the rest, the vast majority caught in the middle, are scrambling to get better–or get out. “The crisis is having a salutary effect,” says Christian Delpeuch, managing director of Ginestet, one of the biggest trading houses in Bordeaux and former head of the region’s wine-industry lobby group.

The shakeout is a case study in globalization’s impact. The best place to see it is in Bordeaux, the biggest French fine-wine region and perhaps the most prestigious. The place is suddenly rife with division: between winemakers and the merchants who traditionally sold their vintages; the top-name châteaux that enjoy worldwide fame–and that are making money faster than you can say premier grand cru classé–and the 9,000 others, about 500 of whom are estimated to be in dire straits; traditionalists and reformers.”We thought we were the king of carrots. We just didn’t see the others coming,” admits Jean-François Bruere, who heads a 220-member regional cooperative. “We never bothered about consumers. Now we’re beginning to wake up.” The shakeout is bearing fruit: after dropping 20% over the past five years, Bordeaux wine exports are rising again, led by the top producers.

Driving those changes is a new attitude among Bordeaux’s main customers, French supermarkets. They’re driving an increasingly hard bargain because per capita wine consumption in France has halved since the 1960s and wine is no longer a staple with meals, being supplanted by soda and water. It didn’t help that Bordeaux made a huge strategic mistake by stepping up plantings in the late 1990s–a move that increased production and exacerbated the already growing pressure on prices. As a result, the balance of power has shifted. “Until 2001, the mentality of producers was to say, ‘I make the wine, I label it, and you take it and pay,'” says Frédéric Guiraud, who runs a regional wine-trading house called GRM. “Four years later, they’re now saying, ‘Do you want it? I don’t care about the price. And can I have an advance?'”

Marie Courselle knows all too well what he means. Château Thieuley, which her grandfather bought in the 1950s and which she now runs with her younger sister Sylvie, used to sell about 30% of its output to big French retailers. Then, two years ago, it received a blunt message: Cut your prices, or we’ll cut back on purchases. The Courselles refused, and their hypermarket sales halved. They are now trying to build up a commercial network of their own. That means relying on a handful of merchants to sell into major markets and doing the rest themselves. When they are not harvesting or tending their vines, Sylvie, 28, and Marie, 30, are touting their wares in Luxembourg, Canada and elsewhere, looking for new sales.

The wine glut’s impact is worldwide. In California some wineries have gone bankrupt, including the Legacy Estate Group that owned prestigious brands, including Arrowood, Byron and Freemark Abbey. (The group was sold last month to Kendall-Jackson.) In South Africa grape prices have dropped about 30% this year, prompting a hunt by producers for new markets. In the Friuli region of northern Italy, which specializes in Pinot Grigio and other whites, winemakers’ cellars are filling with unsold bottles.

Most dramatic of all is the perilous situation in Australia. Its output doubled in a decade, and the country is flooded with unsold wine. And unlike France, which pays for unsold wine to be distilled into industrial alcohol, Australia has no government-subsidized buyer to bail wineries out. Mark McKenzie, executive director of the wine-grape growers trade group, says incomes for some growers have fallen 60% in the past two years. “It’s as bad as I’ve seen it in 46 years,” says Brian McGuigan, an industry veteran and founder of McGuigan Simeon Wines, the nation’s second largest firm.

Viewed from Australia, the French measures seem timid and slow. Australia’s 20 biggest winemakers account for 85% of the market, and they have reacted quickly, cutting prices and taking the financial hit early by writing down the value of their stock. Some grape growers are pruning back vines or switching to citrus or almonds. Even so, Sam Tolley, chief executive of the Australian Wine and Brandy Corporation, the government body that oversees the wine industry, reckons it will take at least an additional two years before supply and demand get back in line.

Some of the Old Guard in Bordeaux shudder at those tough measures, but the region is racing to better compete. Taking a page from the Aussie book, they are trying to simplify the branding by consolidating some of the 57 separate appellations that are now marketed. Five big areas–Côtes de Blaye, Côtes de Bourg, Côtes de Castillon, Côtes de Francs and Côtes de Bordeaux–are planning to combine into a single, expanded Côtes de Bordeaux label. And the Interprofessional Bordeaux Wine Council, the main industry group, recently scrapped 1990s regulations that forbade vintners from making vin ordinaire from their lesser grapes. Get ready for Vin de Pays de l’Atlantique. This year marks the first harvest for it, and 65 winemakers have already signed up.

One of the conundrums for Bordeaux is its renown. The region’s top wines command investment-banker prices because of their quality and limited supply. These makers have no interest in being associated–even remotely–with down-market plonk. Why would they when Château Cheval Blanc and Château Lafite-Rothschild, for example, are currently selling their 2005 vintage for about $700 a bottle? But producers in the middle aren’t happy. They worry that the massive price increases pushed through by the likes of Château Pontet-Canet will give consumers the message that all Bordeaux are expensive. “What does it do to Bordeaux’s image to see people doubling their prices?” asks Marie Courselle at Château Thieuley, who is barely managing to avoid cutting her prices. “They are sabotaging Bordeaux’s image. It’s crazy that we are all put in the same basket.”

Indeed, one of the big concerns around Bordeaux is less about how to move aggressively into a bright new future and more about how to avoid a damaging fragmentation between those who are doing well and those who aren’t. “It’s almost like a Latin American economy, some very rich and some very poor. This could cause a revolution,” worries Pierre Lurton, who runs two of the most exclusive properties, Château Cheval Blanc in the St. Emilion region and Château d’Yquem, the world-famous sweet white Sauternes. Back at Château Pontet-Canet, Tesseron sits down for dinner with his wife Isabelle and a decanter of his house 1996. In the Bordeaux hierarchy, Pontet-Canet isn’t one of the very top châteaux, but it’s still a name, thanks to an official classification dating to 1855, when the French got the jump on market segmentation. Wine merchants that year carved out the top wines, awarding Pontet-Canet 5th grand cru classé. With it came brand equity and pricing power that have lasted more than 150 years.

Tesseron is acutely aware that historic status alone isn’t enough. “I’m in a privileged situation, but it’s not a given,” he says. “I must continue aspiring to be the best.” That means more investment as well as a lot of savvy marketing. This year, for the first time, Tesseron threw open his château doors to visitors, by appointment only, and hired three people to receive them. One of the three speaks Chinese. “Yes, there are new clients, but the real business still comes from our old ones,” he says. “I’m sure in the next 20 to 30 years, people will be interested in products that are top. And I’m doing all I can to be top.” In Bordeaux these days, that’s a mantra for survival.