The U.S. wine business dodged a bullet this month when the 1998 California wine-grape harvest came in at 2.5 million tons, some 13% below 1997's record level. But winemakers' bigger headaches, such as weak consumption growth and a stone-age approach to marketing, appear here to stay.

As Drinks & Diversions

discussed last week, harvest size is the industry's overarching statistic. If the harvest is small, the industry rides a rocket to record profits. If it's large, winemakers take a big hit.

California's harvest is the defining statistic because the Golden State produces more than 90% of all American wine, accounting for three of every four bottles sold in the U.S.

The 1998 harvest still doesn't have winegrowers dancing in the vineyards, ranking as the second largest in history at almost 13% larger than the average harvest of 2.2 million tons. Considering the increased vineyard acreage coming into production, only the rotten

El Nino

-driven weather prevented a grape glut.

But before the vintners break out the corks, there are a few things to keep in mind.

The first is the lousy growth in consumption. Industry statistical wizard Jon Fredrikson of

Gomberg Fredrikson & Associates

says 1998 consumption rose only 2% over 1997 levels, suggesting few new customers entered the market. While consumption of higher-priced wines -- those over $15 -- increased, these wines represent less than 20% of all wine sold. This continues a trend whereby most of the consumption increases since 1991 have come from existing hard-core wine fans -- mostly boomers -- who are drinking more.

What's more, the industry may face a continuing threat of cannibalism from its lower-priced ranks. The 1998 harvest is being hailed as an exceptional one, which means that the quality of grapes going into a $6 bottle could match that of $10-plus bottles a couple of years ago. This could erode prices in the above-$10 range and push down prices of the under-$10 bottles even further than they fell in 1998.

New Approach Needed

As a result, the industry has grown even more needful of a fundamentally new approach to the business. The wine industry should take its cue from the soft-drink business, says Vic Motto of

Motto Kryla & Fisher

, the industry's top CPA and consulting firm.

Motto points out that beer, soft drinks and other beverages maintain decent prices and profit margins even though they have no supply problems. "They are all very capable of overproducing for their markets much more easily than the wine industry can," Motto points out. "But they don't. Instead, other beverage industries keep prices at a profitable level and invest some of the profits in marketing to grow their markets and their profit margins."

Contrast that with the typical vintner, says Motto, who has spent much of the past three years -- a time of record profits never before seen in the industry -- building spiffy new stone walls around his vineyards or investing in a new car or three. Marketing appears to be a dirty word among vintners, which is why the

Wine Market Council

has gone begging for funding that would help broaden the market for wine. As of the first of this year, it managed to scrape together $1.3 million to produce a series of commercials (wine, what are you saving it for?) to test in Austin, Texas, and Albany, N.Y. But even wild success for the test (which starts this week) is no guarantee of support from an industry that has not seized previous opportunities to act in its own best interest.

Vintners need to start listening to Motto. Referring to large public companies such as

Beringer

and

Mondavi

(MOND)

, he says, "There is a limit to growth obtained by taking market share from competitors. In order to grow their brands, these large wineries must grow the market."

But time's running out, according to several new studies released recently. The management of

VinExpo

, the largest global wine trade show, released a report last week that predicts a worldwide glut of wine by 2002. And demographic trends, including those in a new study by

Promar International

of Alexandria, Va., hold more millennial bad news for winemakers. The population, these reports say, will be more ethnically diverse and will show a greater polarization of poor and wealthy at the expense of the middle class. This is bad news for a beverage like wine whose primary constituency, according to all the studies, is educated, mostly upper middle-class and white.

Furthermore, most wine in this country is drunk by the 72 million baby boomers, who are fast approaching the age when their capacity for drinking will begin an inexorable nosedive. Given that the 17 million-strong Gen-Xers are nowhere near able to make up that loss in consumption, a huge problem is brewing.

Can the industry focus its vision on the looming disaster, or will it continue to turn a blind eye -- in hopes that the weather will save it yet again? Only time will tell.

Lewis Perdue is the editor and publisher of Wine Investment News, which covers the 22 publicly traded wine and liquor companies. While Perdue does not hold any positions in the companies discussed in this column, he is the chief technology officer (on a consulting basis) for the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at lperdue@ideaworx.com.