Lodi's Michael David Winery talks Sonoma County wine, ‘premiumization'

Michael David Winery in California's Lodi winegrowing region has been on a growth surge in recent years, amid growth in sales of wine over $10 a bottle.

Sales growth for its The Seven Deadly Zins zinfandel brand, suggested retail price of $16 per 750-milliliter standard bottle, was over 25 percent last year, and its Freakshow cabernet sauvignon and red-blend brand ($18–$20), about 20 percent, the 34-year-old winery told Shanken Daily News. Other brands are Michael David ($16–$25), Earthquake ($26), Rapture ($59), Inkblot (435), 6th Sense ($16) and Petite Petit ($18). Seven Deadly Zins luxury labels include Lust, Rage and Gluttony ($59). The winery also makes Incognito ($18) for grocery chain Kroger.

The vintner farms 800 acres of grapes around Lodi and ranks No. 28 among U.S. wine companies with 700,000 cases sold in the U.S. and another 100,000 globally, according to Wine Business Monthly.

To help manage its growth, Michael Phillips purchased a 70,000-case-a-year winery in Sonoma County's Alexander Valley from Silver Oak Cellars last summer. Near-term plans are to process purchased North Coast winegrapes locally, and the long-term vision is to produce a Sonoma County wine.

Kevin Phillips, vice president of operations for Michael David Winery is set to be on a panel discussing "premiumization" at the Journal's Wine Industry Conference in Santa Rosa on April 26 (nbbj.news/wine18). That term and “trading up” have been buzzwords in the wine business in the past several years, reflecting a trend in U.S. wine sales toward faster growth at higher prices.

Phillips talked to the Business Journal about production of ultrapremium and luxury wines from Lodi, interest in half-bottles for California restaurants and strategy for creating a Sonoma County brand.

What do you see happening with premiumization?

KEVIN PHILLIPS:

Unlike a lot of other wineries, premiumization hasn't been a shift for us. Our price points haven't really shifted. We were already in these price points considered the premium categories.

The one difference since this phenomenon has progressed is we've seen bigger percentage movements in our middle- and higher-price-point areas. Our Earthquake series with a zin(fandel), cab(ernet) sauv(ignon) and petite sirah retails in the mid-$20 range. It's been doing well, with sales (growth) in the 5 to 7 percent range per year, but in the last couple of years, it has been rocking at around 20 percent.

Even our lowest-price-point wines would still be considered in the premium category.

Has that strong growth been in any particular sales channel? Have you seen shifting between channels?

PHILLIPS:

Everything I'm going to be talking about is three-tier-distributed product shipped around the country. We have a decent business direct to the consumer through the tasting room, but it is such a small percentage of our overall business.

Chain retail is the easiest thing to track with IRI and Nielsen data. We're seeing increases in other channels, too, but we don't have the same data.

Do you have much of an on-premises play?

PHILLIPS:

It's getting better. From what I can tell it still seems to be price-sensitive. Our lowest price points are now a little more accessible, whereas before on-premises shifted away from them. Now, a $10 or $12 by the glass isn't a big deal, but before if they couldn't get it for a $5 glass, you would not even be a contender.

Don't know if it's a premiumization shift. It could be a shift because of our sales staff increasing and our brands becoming better-known.

Which of your brands play more at on-premises accounts versus chain retail?

PHILLIPS:

If you're talking by the glass, our lowest-price products align with on-premises and chain retail price points. Our FOBs for The Seven Deadly Zins and Freakshow brands are around $110 to $120 a case.

(FOB is a trade term for “free on board” and refers to where the buyer takes on liability for products. Historically, wine has been sold FOB at the winery at a price per 12-bottle case that's roughly half the suggested retail price.)

Are you planning any different approaches in packaging to go into different markets?

PHILLIPS:

Not a lot. We have a 375 (milliliter, half-bottle) Seven Deadly with a screwcap that's been one we started playing with a few years ago, and it's exclusively for on-premise(s venues) and almost exclusively by-the-bottle (sales). That has been increasing since we introduced it, but it is tracking about the same as our 750 (milliliter, full-bottle) sales. I can't say for sure whether the screwcap is changing that, but it provides an option.

Especially in California, consumers are very sensitive about how much they are going to drink when they're out at dinner. The 375 in a screwcap makes it easy for the restaurant, and the consumer knows they are not going to be over-indulging.

Restaurants that want to run by-the-glass (sales) seem to be just fine with the 750s and have no interest in the 375s for that.

A much newer phenomenon, in our second vintage now, is we're doing wine in kegs for our Freakshow cabernet (sauvignon). Every time I look at the monthly reports, I see an increase. It's off of a small base, but there seems to be growing acceptance of that. It is (kegged) by Free Flow (Wines of Napa).

What was the rationale for acquiring the Sonoma County winery?

PHILLIPS:

It's a two-pronged approach. There is a short-term goal and a long-term goal.

I'm buying a lot of (North Coast) fruit and have been for a while. That is increasing. I'm moving a lot of fruit from over there to over here. Timing doesn't always match up. There are a ton of processing difficulties I had to overcome.

(Buying the winery) answered a lot of those problems right away. Bam, I now have a North Coast hub; I can filter all my wine through a winery I control, eliminate custom crush, eliminate logistics of bringing fruit here, the logistics of (harvest contractors) over there having to come here to get (grape-picking) bins then take them over there then get them back.

It solved a lot of the current needs of our operation and was the primary driver of the acquisition. It worked relatively well last year, and I expect it to work better this year. Having to staff a facility we didn't know; we didn't retain any of the institutional knowledge. We had to hire people at not exactly the best time of year (just before harvest) and start processing (newly picked grapes) all within four weeks.

We got a lot of help from the mothership in Lodi. We started getting some processing patterns and protocols established, then the fires threw another hurdle at me. We had a facility with wine in it that already was short-staffed and now I had staff that couldn't even get there. I've got fruit I was planning on taking there that I was rediverting to Lodi.

I'm pleased with the staff we have over there, and we have some plans to do some real processing this year and absorbing the majority of our North Coast supply.

The longer plan, and it's a long way out there. We do have a plan of eventually launching a Sonoma-centric brand and using that facility as the base, the identity for that brand.

It's easy from my perspective, because I can pick up certain varieties in Sonoma. I was already using those in my Lodi product for blending. Now, I can expand that. When any of (the wines from that fruit) start standing out, I can start pinching them off and barreling them down differently, aged differently, then we can start building a core of some Sonoma wines. It's an easy way to do it with very little risk.

We have way bigger issues with growth to contend with, but that is a plan for down the road. I'm hoping that we can open that tasting room in 2020 with some small brands for tasting room only and starting building that from there.

Would that be a basis for building a bigger direct-to-consumer part of the business?

PHILLIPS:

I don't know that location there will be the best for direct to consumer. Realistically, my location in Lodi is probably 1,000 times better than the one in Sonoma.

We're so well-established and entrenched in the distribution system, but now with the Sonoma base we have a story to go with that. We can guinea-pig some things through that tasting room and eventually start finding focus on what we want to take to another level and put out through distribution.

Would having a Sonoma-based level of wines help with the cost structure of fruit you're getting from the North Coast, to take that up to a higher-priced tier?

PHILLIPS:

It will allow us to bump the quality by having that hub right there. So fruit is not having to travel as far, and we're not spending money on custom crush and not being able to do all the things we want to do with it.

As for an increased-price Sonoma wine, we're not there yet, and I don't know where we would be price-point-wise.

Your wines are already in the ultrapremium range of $15 to $20, and some in the upper echelons, over $20.

PHILLIPS:

When you go wine-tasting in Napa, you won't even find a wine in that pricing point. Seventy-five percent of our wine is retailing from $14 to $18.

You're already in the realm of where a number of Sonoma County wines are starting at.

PHILLIPS:

For second labels and white wines, a lot of (Sonoma County) wines are in that realm. Our Earthquake wines in the $21 to $25 level, and that's probably where most Sonoma reds are at.

Those prices work well for us as Lodi-centric wines. I'm not sure how that will work when we start developing a Sonoma-centric brand. If I were guessing, based on how our models are set, we'd probably have to be retailing in the high $20s, maybe even the low $30s. That's factoring in our packaging and grape costs, which are a completely different spectrum than what we have in Lodi.

-

Jeff Quackenbush (jquackenbush@busjrnl.com, 707-521-4256) covers the wine business, commercial construction and real estate.