December 10, 2010

Allen Shoup

Shoup

Firm: Longshadows Winery

Position: Owner

Allen Shoup is widely recognized as one of the founding fathers of the Washington wine industry. While CEO of Stimson Lane, corporate parent of Washington wine giant Chateau Ste. Michelle, he garnered worldwide fame for Washington wines by combining state-of-the art technology with exacting principles of viticulture and enology. Shoup is a founder of the Washington Wine Institute and the Northwest Wine Auction. He helped create the Washington Wine Commission and was instrumental in organizing the American Vintners Association.

Q: You’ve been in the wine business forever and watched its enormous growth in the past 40 years. How has it fared in the last three years with this recession?

A: It’s hard to generalize about the wine business. The recession actually increased wine consumption in general and low- and moderately priced wines did quite well. Fine-dining restaurants suffered a lot and restaurants that sold high-priced wines saw their orders drop dramatically. People simply stopped paying for anything over $100/bottle and most stayed under $50.

In 2009 we saw high-end wines hit the wall and create excess inventories — they still represent bargains in the broad market place. Sales in 2010 picked up, but for many have not reached 2008 levels. Remembering that the world has been producing much more wine than it can sell for almost 40 years, battling for market share is nothing new. Branding is everything in this business.

Q: In the recent election, Washington state voters decided to keep the state in the liquor business. What was your take on Initiatives 1100/1105 and where do we go from here?

A: The initiatives were written to support special business interests but were disguised as a response to voters’ wishes. Costco, with the support of other bulk retailers, has been successful at winning lawsuits directed at the alcohol distribution industry.

Since the end of Prohibition, the distribution industry has enjoyed both federal and state regulations that provide it with special protection against competition. These laws and regulations were implemented by using the powers and some of the early intent of the 19th Amendment of the U.S. Constitution (repeal of prohibition).

With 1105, the distributors of Washington were trying to use the referendum process to re-establish those rights. Costco retaliated with 1100. The Costco referendum did its job by killing the distributor referendum but may have burned a few bridges in the process. Both tried to do with an ax something that requires a scalpel.

I believe the state will be out of the retail liquor business in a few years, or sooner, but a complete new liquor tax and licensing system has to be set up first. The wine and beer industry has this already. Distributors will survive as they have in California and other states. Those that reinvent themselves with special service and capabilities will even do better.

Q: According to the Washington Wine Commission, the wine industry’s total economic impact on our state is over $3 billion, with wine grapes among the highest tax generators of any agricultural crop. How much more can that grow?

A: This number uses a lot of economic multipliers to get to $3 billion. Wine creates revenue not just in growing and processing wine grapes, but packaging, marketing, retailing and tourism (Napa Valley is California’s largest tourist attraction). Then there are all the industry offshoots like hospitality, transportation, etc.

Washington state only produces about 5 percent of all the wine made in America. California produces 90 percent. Our vineyards are as good as California’s best and we have unlimited land to plant (if we are given another 1 percent of the 97 percent of the Columbia River water that is currently required to be dumped into the rising Puget Sound).

Considering all this, we have barely scratched the surface of our long-term potential. But this is a highly capital-intensive and long-term payout business, so it will grow in fits and starts, not a straight-line curve.

Q: Sounds like there are some major water rights issues in Eastern Washington’s vineyards. Can you boil down the situation?

A: The water situation in Eastern Washington is too big to boil down to one paragraph. But the fact is the best farmland is arid and requires irrigation. Our many mountain-fed rivers are the best source, and the Columbia River as it crisscrosses down and around from the top of the state through the Columbia Valley and along two-thirds of the Oregon/Washington boundary is the mother of all water opportunities in America.

It has probably been 40 years since the government last allowed a pumping station on the river. We could easily convert millions of acres into fecund high-value crop agriculture if water was available. I believe it is not a shortage of water that causes this problem. It is a shortage of regulatory gray matter.

Q: You’re in the premium wine business, have you seen any shift in purchasing habits during this financial slump? How does a winery survive?

A: It’s more difficult to survive in a recession when your products are high-priced. But you don’t change your way of business, you intensify your commitment. You must survive over time and never compromise on quality. The more difficult the economy, the more necessary it is to have the quality that supports the smaller and more competitive environment.

Make less, but never cut production cost. Slow periods are a good time to prune out your lowest quality grape growers and your lowest value wines. Lowering prices comes at great risk because price is often indicative of quality. The quality brands that disappear over time are those that took shortcuts in bad times and in the process forgot what it was that got them success in the first place.

Q: Tell us about the export market and where that’s headed.

A: The problem with the wine export market is that for the most part the significant wine markets are where there is a major wine industry. Great Britain, Scandinavia, Japan, and now to a limited degree China are the exceptions. In the Asian markets the business is mostly for the tourist, but that’s slowly changing. In the northern Europe market it is very Eurocentric for fine wines but not for value-priced wines. They will buy anything, it is cheap. No market is ever loyal to value brands and somebody will always show up to under price you.

I personally sell to about 10 countries, more than most Washington wineries, but not unusual for the well-established ones. In the end the export business is always good for the lowest-cost producer and the high-cost, quality producer with a well-established premium name.

Q: There are over 650 wineries in Washington today compared to 20 30 years ago and most of these are boutique wineries. Can they all survive?

A: Any winery can survive the way any restaurant can survive, as long as the wine or food is decent and properly priced. They must have a legitimate reason for being in business and adhere to it. The reason can be anything from convenient location, special service, types of wine style, unique packaging, a fun location to visit, the strong, positive personality of owner or winemaker, etc. Ideally you have all those and more.

There is room for lots of wineries just as there is room for many restaurants, but in most cases they don’t make it for pretty basic reasons. Financing being number one. Quality number two. Management number three.

Q: A drive through Woodinville these days is like driving along the Highway 29 in Napa, with a winery every 10 feet. How important is this type of clustering in this business?

A: Not very important. In fact, despite my decision to locate a tasting room in Woodinville, I don’t like it. It’s non-authentic. Chateau Ste. Michelle probably did more business out of the retail shop when no one was out there than they do today. We built the winery there not because we wanted an urban winery but because we needed to bring the mountain to Muhammad.

Nobody was driving to Eastern Washington to taste wines in the 1970s and 80s. A winery has to be in a wine region to really draw traffic as people usually want to visit more than one, but many of the most sought-after wines in the world exist without a visitor program and at major distances from other wineries.

This may simply age me, as I’m very much a traditionalist when it comes to wine, but I fear that as we do away with corks, and use more convenient packaging, put wineries in strip malls and treat it like beer, we slowly destroy the ceremony that sets wine apart. It is the only consumer package that you can place on the table at a formal dinner party anywhere in the world and, not only is it not crude, it helps to dress the table. And if it’s the “right” wine it makes a bigger statement than even the fine china and silver.

That said, urban retail clusters are working in places like Woodinville and parts of Eastern Washington, and may very much be a future trend in the world of wine. But honestly? I hope not.

— Interview conducted by Barbara Travers

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