Boosted by an improving economy, a diminishing glut of wine grapes in California and an uptick in prices, the wine industry is slowly recovering from one of the toughest retail markets in years, according to an annual survey by a wine economist at the University of California, Davis.

The industry's biggest challenge is appealing to increasingly daring consumers, says Professor Robert Smiley of the Graduate School of Management.

Wineries are streamlining their operations, focusing on their core brands and reducing costs while some are moving forward with innovative packaging such as screw tops and higher quality wine in bag-in-a-box containers.

"Consumers are definitely more price -- and value conscious -- than in the past," Smiley says. "There's less brand loyalty. They are buying more in chains and wine clubs, and they are more adventuresome in trying new wines."

Smiley discussed the results of his survey of the California wine industry -- including 350 respondents from wineries, growers, distributors and wine sellers -- and of his interviews with 33 industry chief executive officers at the Wine Industry Financial Symposium in Napa today (Sept. 22).

The executives said the hottest issues are globalization and increased international competition, the high cost of doing business in California and the beginning of a new business cycle.

Supervalue wines decline

A majority of the 33 winery heads said inexpensive wines such as the Charles Shaw labels -- nicknamed "two-buck chuck" for their $1.99 price at Trader Joe's stores -- won't be driving prices down over the next year.

"The consensus is that the demand for supervalue wines under $3 a bottle has peaked and will be declining," Smiley says. "Consumers and retailers are tiring of them, and the oversupply of grapes that fueled the production is ending."

But most of the executives said supervalue wines will have a lasting impact on the industry. When asked if consumers would return to drinking big-name labels -- such as Mondavi, Beringer and Fetzer -- that have been hit hard by the popularity of inexpensive and supervalue wines, more than half of the executives said those companies will have a difficult time.

"As consumers become more knowledgeable about the quality of less familiar and less expensive imports," Smiley says, "it is going to make it hard for the established producers to get them back."

Profits looking up

The majority of survey participants were optimistic about the bottom line. About 70 percent of the wineries, vineyards and lenders expected profitability to improve over the next two years.

To take advantage of the industry upswing, wineries are focusing on sales efforts, understanding their customers better and capturing operational efficiencies, the survey found.

Part of the rising profits will come as a result of more mergers and acquisitions, which have taken mid-sized and large U.S. wine producers and made them global. These multinational wine companies are able to better control the world's supply of grapes, Smiley says.

"It's expected to even out cycles in the industry," Smiley says of the globalization trend. "The market is likely to stabilize and become less volatile. You're not going to see the price run-ups like you did in the late 1990s."

Sales growth

Looking ahead three years, wineries, vineyards and distributors were split on the price range that would have the strongest sales growth. About 20 percent of each group believed that $3 to $14 wines would all show strong gains.

However, more than 60 percent of retailers expected their strongest sales growth would be in wines priced between $7 and $10. And in a complete turnabout from the 2003 survey, this year's survey participants were nearly unanimous in their belief that high-end wines wouldn't have very strong sales growth over the next three years.

The majority of survey respondents said Pinot Grigio would outpace both Sauvignon Blanc and Chardonnay as the white varietal with the strongest sales growth through 2007. More than half of the wholesalers and distributors predicted that, among red varietals, Cabernet Sauvignon would have the strongest sales in the same period. Smiley says an excess of Cabernet grapes is probably a factor in the distributors' responses.

Meanwhile, grape growers continued to cite concerns about their ability to fight threats such as Pierce's disease. They also said they are feeling increasing pressure from environmental groups opposed to the use of genetically modified crops.

Smiley addressed winery owners and executives, grape growers, distributors, financial-service providers and other industry professionals at the invitation-only symposium.

He is the director of wine studies at the UC Davis management school, which will host its annual executive program for wine professionals in March and is one of the teaching sites for the Bordeaux Business School's globe-trotting Wine MBA program.