Econ Focus

For an office worker, coffee is the usual pick-me-up at midday. Mark Pons starts his afternoon at Waldensian Heritage Wines in Valdese, N.C., by uncorking a bottle of Burgundy. Pons sits in a large room with exposed wood beams that serves as the winery's tasting area, then chats with the cashier behind the counter while he casually sips from his glass.

Pons and Waldensian's other workers are among a growing contingent of North Carolinians making a living by making wine. The number of wineries in the state jumped from a single operation in 1975 to 23 in 2002. They are typically small, family-owned businesses that produce less than 10,000 cases of wine annually, accounting for just a fraction of the 231 million cases purchased in the United States in 2001. But they have a significant impact on farming communities.

"A winemaker gets a very high dollar value per acre of grapes," explains Bill Nelson, vice president for government relations at the American Vintners Association (AVA). Also, wineries "provide stable employment in rural areas. Each one is small, but getting a lot of them [in one place] provides a node of stability."

Virginia has long promoted its wineries, many of which have established strong reputations and have become popular tourist destinations. The Tar Heel State has taken a similar path to boost its rural economies.

North Carolina was a leading wine-producing state in the antebellum period. As many as 25 wineries derived their elixir from two sources — native Scuppernong grapes, which were discovered on Roanoke Island by a colony of Sir Walter Raleigh's in 1587, and hybrids of Vitis vinifera grapes from Europe and disease-resistant species from the eastern United States.

The destruction wrought by the Civil War only temporarily halted winemaking in the Tar Heel State. What had a bigger impact on vintners was the temperance movement that began in the 19th century and gained political momentum in the late 1800s and early 1900s. North Carolina legislators banned alcohol sales in 1909, then the federal government imposed Prohibition 10 years later. The winemaking industry continued to shrivel up under the alcohol control laws that remained in the South after Prohibition was repealed in 1933.

During the last three decades, winemaking has experienced a comeback in North Carolina. A few wineries were encouraged to open in the 1970s when state lawmakers reduced the winery license fee and the tax on native table wine. But the biggest catalyst in the industry's renaissance has been the profit potential of the business as demand for wine has spiked in the last two decades.

Winemaking has offered North Carolina farmers a way to realize greater value from their land. An April 26, 2002, report in The Business Journal of the Greater Triad Area noted that a winery could earn $30,000 per acre if it successfully cultivated its vineyard and turned its grapes into wine. This compared to a profit of $5,000 per acre for just raising and selling grapes.

Recently, tobacco farmers have pursued grape cultivation and winemaking to keep their family-run businesses in operation. The Golden LEAF organization, which disburses some of North Carolina's settlement from the cigarette industry, has helped finance classes at Surry Community College for farmers and others interested in operating their own vineyard or winery.

Entrepreneurs like Amy and Michael Helton have also been drawn into winemaking. The Heltons returned from their honeymoon in southern France with a desire to start a winery of their own. They scouted for land until they found an old farm in Yadkinville in October 1996. Their company, Hanover Park Vineyard, harvested its first grapes in 1999. Since then, its production has rapidly expanded from 375 cases to 1,000 cases in 2000 to an estimated 2,000 cases in 2002.

Demand for wine in the United States has been strong overall. It peaked at 174.5 million cases or 2.58 gallons per adult in 1982, according to the Wine Market Council, then receded through the 1980s and early 1990s due to the increase in the legal drinking age, the popularity of light beer, and other factors. Total wine consumption rebounded in 1994 and has steadily increased ever since, while per capita consumption has grown at a slower pace.

According to the AVA, baby boomers have been more interested in gourmet food than previous generations. Increases in per capita income have supported this lifestyle change. More people can afford to enjoy fine dining at home or at their favorite restaurant, and a good glass of wine complements both activities.

At the same time, the AVA's Nelson says people prefer wines with a regional connection, such as Robert Mondavi products from California's Napa Valley. Virginia has been capitalizing on this interest since the 1980s by cultivating its winemaking industry. Virginia Polytechnic Institute and State University has helped growers develop grapes that are hardier and more flavorful, while the Virginia Winegrowers Advisory Board has funded the research and marketing efforts of wineries. Today, the state's 73 wineries have earned a reputation for excellence that has been rewarded in numerous international wine competitions.

The North Carolina Grape Council has promoted winemaking since 1986, but Nelson believes the state's wineries are still in the process of differentiating its products. He says they are working on producing enough wine and gaining enough experience in the marketplace "so that people recognize North Carolina wines as a distinctive class of products."

In general, point of origin can add value to a product. For example, Vidalia onions from Georgia are known for their unique flavor and consistent quality, so they often command better prices compared to their unnamed counterparts in the produce section.

In winemaking, location is everything. Environmental factors such as climate and soil conditions create subtle differences in the flavor, color, and aroma of grapes. Also, a vineyard exposed to warm weather by day, cool weather by night, and moderate moisture produces better grapes than another vineyard that experiences colder or wetter weather.

Therefore, buyers make fine distinctions between wines based on the origin of their grapes. In turn, wineries closely monitor the winemaking process and, when the conditions are right, cultivate their own grapes to gain better control over their end product. "The great wines are made in the vineyard," says Nelson. In the Napa Valley, for example, some wineries sell name brands for two to three times the price of similar wines made by competitors only a few miles away.

Advances in grape growing, also known as viticulture, have enabled fruit from the Vitis vinifera family to thrive throughout North Carolina, especially in the Yadkin River Valley and other points west of Greensboro. Viniferous grapes, which command higher prices in the wine market, include Chardonnay, Cabernet Sauvignon, Cabernet Franc, and Merlot. The Scuppernong, North Carolina's native grape and official fruit, grows mostly in the eastern counties.

But every vineyard cannot grow every type of grape whose fermented juice is in demand. Therefore, instead of relying on ingredients only from its own vineyard, a winery often buys grapes from a variety of sources and blends them to satisfy the changing tastes of the marketplace.

Winemakers also turn to outside vineyards when their supply of grapes cannot meet its production needs. Since grape cultivation and wine fermentation can take several years, a winery must maintain an adequate inventory that is ready for bottling. However, unexpectedly strong demand can force a winery to sell a wine "before its time" unless it can fill the supply gap.

The long production cycle of winemaking requires not only good inventory control but deep pockets as well. "The longer that the winery allows its wine to age and develop its optimum character, the more money it has invested in it," says Tania Dautlick, executive director of the North Carolina Grape Council. "The first couple of years are really tough because there is so much money invested, but you can't sell the wine right away. A lot of the red wines have to be aged in oak barrels for two years before you can take them to market."

That's why owners of smaller wineries frequently have day jobs to pay the bills. For instance, Amy Helton of Hanover Park Vineyard teaches in Chapel Hill while she and her husband continue to build their business.

Once a winemaker has something to sell, the next hurdle is getting it to customers. There are a couple of ways that wineries distribute their products. Beverage wholesalers can transport wines within North Carolina and export them to certain states, but legal and market issues can make this distribution path difficult, especially for smaller wineries (see The Winding Road of Wine Distribution).

The alternative is to bypass wholesalers. Many wineries negotiate with retailers and restaurants to carry their product, as well as sell directly to customers who visit for a wine tasting. Some have created tasting rooms where wine connoisseurs can sample different vintages and varieties in an elegant environment.

Providing tastings also supports product differentiation and builds brand loyalty. "Customers identify with a wine more closely when they have been able to meet the winemaker, see where the grapes are grown, and taste the full line-up of wines," explains Dautlick. After their visit, "they'll seek out the wine in the grocery store or at a restaurant."

Standing out in the burgeoning wine market is essential, which is why some wineries spend a lot on advertising and promotion. "Marketing costs can eat up 50 to 70 percent of gross sales," surmises Nelson.

But not all wineries take out expensive ads in magazines such as Wine Spectator. In fact, successful operations have been built using old-fashioned word of mouth and roadway signs that point wine lovers in the right direction. For example, Joel Dalmas, one of the owners of Waldensian Heritage Wines, says people from all walks of life follow the sign on Interstate 40 to see what his operation is like.

Not only does a strong tourist trade help promote a winery's product, it holds the promise of bringing dollars into rural economies. According to a 2001 survey of wine-related tourism by Virginia Commonwealth University's Center for Public Policy, out-of-state respondents spent about $55 per person on food, shopping, lodging, and other expenses. About 71 percent said that their primary reason for visiting a community was to see a local winery or attend a wine festival.

Evidence of winemaking's tourism potential can also be found in the Tar Heel State. The second annual North Carolina Wine Festival drew 11,000 people to Forsyth County to enjoy wine, food, and music in June 2002. Elkin, N.C., held the first Yadkin Valley Wine Festival the previous month, attracting 4,500 visitors to the small town of 4,100 people.

Given the strong tourist trade in North Carolina and rising demand for wine, there seems to be room for growth in the winemaking industry. The Grape Council expects 10 more wineries to open in the state during the next two years.

As the industry grows in size and clusters in certain regions, wineries may need additional sources of grapes. Some wineries like Hanover Park can fulfill their needs from local vineyards, but others like Waldensian Heritage Wines already can't get what they need locally and import grapes from as far away as New York and California.

Even with 224 separate vineyards producing 2,000 tons of grapes in 2001 and less than two dozen wineries, it is a seller's market according to Dautlick. "There aren't quite enough grapes to go around."

The state has tried to encourage the establishment of vineyards in order to facilitate future growth in winemaking, but ultimately it will be the growing demand for grapes that will bring new suppliers into the market.