B.C. wine industry heading for disaster?

Two Canadian university professors have written a paper criticizing British Columbia’s wine industry.

The paper, published by the American Association of Wine Economists, is entitled AAWE Working Paper No. 89, The Wine Industry in British Columbia: Issues and Potential by Andy Hira and Alexis Bwenge. It’s based on a 2009-2011 study on the competitiveness of the B.C. wine industry, compared to other wine industries (including those in Italy, Spain, Chile and Australia).

Hira conducted 53 interviews and surveys with winemakers and suppliers throughout the Okanagan Valley in 2010; the researchers also examined historical, political, economic and social factors within the province.

The results do not favour British Columbia’s industry, and in fact, the researchers — from Simon Fraser University’s Political Science Department — found that, as compared to other world wine industries, “there is far less cooperation, institutional support and leadership, and a heavy dependence on the local market, especially local tourism.”

From the report:

• Land prices have skyrocketed for anyone who has recently entered the industry

"Good vineyard properties sold in the early 1990s for as low as $2,000/acre. By 1993-1994 the price had increased to just over $4,000/acre for raw vineyard land. In 2002. the price in the south OKV had increased to about $40,000/acre (planted). It peaked in 2008 at about $120,000/acre (planted) but has settled back now to an estimated $80,000 - $90,000/acre (planted)….An influx of Albertan money ‘willing to purchase at any price’ was responsible for the rapid inflation."

• Winery owners are finding the industry is much more difficult than they anticipated.

"Already there are rumours of many (up to 30) wineries being put up for sale, including one long-time family business with several wineries declaring bankruptcy. And there is certainly a gradual recognition by entrants about the arduous and tempestuous nature of the business. Several interviewees remarked that it is really more like farming than winemaking, and subject to all the volatilities (weather, pests, disease, etc.) of that occupation. One interviewee, coming from the financial sector, remarked, 'I’ve never worked so hard in my life. I had no idea it was going to be this labour-intensive.' This has led several of the smaller wineries, as well as a growing proportion of absentee investors, to hire consultants to run their wineries."

• The industry is in danger of overproduction, with no market for excess wine.

"Longtime industry insider Bill Collings states, ‘There are about 10,000 acres planted to grapes in the province, most in the Okanagan Valley. At 12 million litres, this means that on average, each acre yields only about two tons per acre. Normal production per acre I estimated at between 3 and 4 tons per acres. At 3.5 tons per acre, the wine yield would be 21 million litres. Full grape production would be a disaster for the BC industry. The industry is currently having difficulty selling 12 million litres; 21 million litres will result in huge unsold inventories.’"

• There is little support from the provincial government.

"There is currently only one employee from the Minstry of Agriculture, Food and Fisheries (MAFF) involved in the industry, and he covers both grape and fruits. He spends most of his time on R&D (research and development) and other industry boards."

• There are few personal ties between wineries, especially amongst smaller wineries near Cawston and Kelowna.

"One small winemaker in Kelowna said he/she felt ‘surrounded’ by larger wineries. One winemaker said, ‘I sometimes chat with some of the local winemakers at the local pub when I run across them,’ indicating the haphazard nature of social interactions in the industry."

"The Naramata Bench, near Penticton, made up of some 25 long-standing estate wineries clustered together geographically, is the best-organized group, and is cited by several of the small and smaller estate wineries as an example to follow."

• Winemakers are unable to focus on certain varietals.

"Almost all decent size wineries have to outsource their grape supply, which come from a variety of terroirs and mesoclimates around the valley."

• There is growing friction between grape growers and winery owners.

"It is also fueling the expansion in the number of wineries as grape growers feel that they are not getting a fair share of the final profits, and so decide to move into winemaking themselves. All of this will change, if either the demand or supply of grapes changes, as is inevitable at some point, bringing up the question of whether the anarchic structure of winery-grower relations can adapt."

"Most importantly, the uncertainty around these arrangements means that it is difficult to improve quality among the grape growers, as investments by the wineries could lead to defection (sales to other wineries) and the feeling among grape growers that such investments are not worthwhile when demand for their product is so high."

• Labor shortages and costs are also creating issues.

"Rising costs and a shortage of labour have led to increasing use of temporary migrant workers, many from Mexico, and accompanying concerns about labour practices in the industry. Workers are not unionized, but activist efforts have led to some notice about their conditions."

• There is a lack of local equipment suppliers, and a bias against those that do exist.

"Most equipment, corks, bottles, labels, chemicals, and other inputs are imported. In Oliver, Okanagan Barrel Works operates as the only cooper in the region, using wood imported from elsewhere. Interviewees note a bias against local products; for example many said that many local wineries insist that the wood used must be imported from France."

• The province’s tax and retail systems have created problems with how wines are sold.

"'Despite what you read about our burgeoning local industry and the rise in quality wine production, the best (BC) bottles are seldom seen in government stores because local producers have the freedom to sell direct and avoid the massive tax levied on wine sold in government stores and private wine shops,' according to Wine Access editor-in-chief Anthony Gismondi, in a column for the Vancouver Sun. He refers to direct sales to restaurants, on-line, and at retail winery shops, which are exempt from price markups and taxes."

In the report’s conclusion, the researchers state “policy changes are constrained by the use of liquor sales and accompanying protectionism as a cash cow through the provincial monopoly….The bottom line is that no one in BC has a strategic long-term vision for the industry.”

The researchers say they “hope the report will spark debate and interest in further serious research into how to improve the long-term competitiveness of BC wine.”

For more information about the American Association of Wine Economists, go to wine-economics.org.