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2BC continues to turn wine industry upside down

Bronco Wine Co. to Trader Joe’s to Charles "Two-Buck Chuck" Shaw continue to throttle the California wine industry from escaping its economic doldrums like a cork that refuses to budge from the neck of a wine bottle.

According to some experts, Fred Franzia, president of Bronco and his upscale boutique groceryman Trader Joe’s, continue to captivate consumers who are still buying thousands of cases — not just bottles — of Two-Buck Chuck, keeping other California wines from economically scoring.

It’s not unlike Chicago Cubs infielders/double play magicians Joe Tinker, Johnny Evers, and Frank Chance who more than 90 years ago kept competing players from scoring as the most memorable double-play combination in the history of baseball.

Tinker to Evers to Chance led the Cubs to their last World Series win in 1908. It may be that long before Franzia and Trader Joe’s run out of Two-Buck Chuck, and the California wine industry can recover from the most incredible marketing coup ever.

Consultant John Stallcup said the last 18 months of the Two-Buck Chuck era have been "like windsurfing in a hurricane" for the California wine industry trying to compete against millions of cases of wine being sold for $24 per case.

At the recent Unified Grape and Wine Symposium in Sacramento, Stallcup was on a panel entitled "The Wine Industry at the Beginning of the 21st Century: A Fast Ride in a New Direction." Subtitle: "What do we do about Two-Buck Chuck?"

Afford success?

It is difficult to criticize an incredibly successful marketing effort, but the panelist left little doubt it has been a challenge for everyone else. And, at least one, Jeff O’Neill of Golden State Vintners, expressed doubt that the growers and vintners can afford sustained success of the "extreme value" class of wines.

Fortunately, the panelists say an overall economic upturn in the U.S. economy is offering opportunities to sell out of the doldrums rather than wait for Bronco and the other low cost wineries to drain wine tanks of surplus wine.

However, Two-Buck Chuck will likely forever remain the proverbial 800-pound gorilla because it is good quality varietal wines selling for a bargain basement $1.99 per 750 milliliter corked bottle. Trader Joe’s promises on its Web site to continue selling Charles Shaw wines.

That is not particularly good news because since the Shaw wine stormed on the scene it has driven down the bottle prices and therefore winery margins for all wine segments.

It has reached such fame that it now has its own moniker "2BC."

Consumers are saying "Why should pay I $10, $7 or even $5 for a bottle of wine when I can get good quality varietal wine for less than $2 per bottle?"

Two-Buck Chuck is forcing "huge readjustments" in wine prices, according to O’Neill, president and CEO of Golden State Vintners, the state’s fifth largest winery that also farms 15,000 acres of grapes.

O’Neill said he chuckled recently when he heard a premium wine vintner talk about the "magic" of producing high quality. "The only magic I have seen in the past five years is the disappearance of numbers from my balance sheet."

Changing industry

Super value, extreme value or whatever adjective you want to put before the word value to describe these $2 bottles of wine, it does not change the fact that, according to O’Neill, they are structurally changing the California industry.

Contrary to popular belief that 2BC is creating new wine drinkers, Christian Miller, director of research for Motto, Kryla and Fisher, noted business strategists, said of surveys show only 5 percent of 2BC buyers are new wine drinkers. That is the bad news. Worse news is that 38 percent of extreme value wine buyers are switching purchases from higher priced wines. Fortunately, there is good news -- 57 percent of the people buying 2BC are adding to their wine purchases. 2BC is increasing consumption among regular wine drinkers.

Consumers do not views 2BC as cheap wine. They view it as value priced quality wine and half of them who buy it once buy it again...a "very high" repurchase percentage, according to Miller.

Two-Buck Chuck gained a cult-like following based on two untrue stories that initially jettisoned thousands of bottles of 2BC off the shelves of Trader Joe’s, the only place the wine is sold; one is that the Charles Shaw wine was $10 wine unloaded for $2 in a nasty divorce settlement. The other is it was wine airlines could no longer serve on their flights post-911 because corkscrews were banned from air travel.

Miller was asked that when consumers realize those stories are false would Charles Shaw sales plummet? Miller said the value of 2BC is what is driving sales, not fanciful stories.

Quality and trust

2BC continues to sell partly because the quality value is still there, and Trader Joe’s is one of the most trusted grocery chains on the West Coast.

Bronco purchased the Shaw label along with many others from the defunct North Coast wineries. Bronco purchased millions of gallons of surplus wine from cash strapped wineries in the throes of one of the worst oversupply/low price situation ever. Bronco bottles 2BC at a large Napa, Calif., bottling plant and distributes exclusively to Trader Joe’s. Bronco is one of only two wineries in the state that owns it distributorship, thus cutting out the middleman and keeping the price less than $2 per bottle.

2BC has primarily been a West Coast phenomenon because it cannot be sold that cheaply outside of California. Nevertheless, the 2BC story is spreading rapidly worldwide.

Charles Shaw has spawned many "clones," but according to the panel they have not done as well from traditional grocery stores shelves because they have not attracted the following like 2BC.

With price discounts on all wine, O’Neill said wineries had had to readjust inventories. However, he said the success of 2BC is on the back of lower prices to growers. Low wine grape prices to sustain 2GBC and its clones cannot continue forever because growers cannot make a profit, he added.

"It is very questionable if extreme value wines are sustainable at current prices," he said. "Wine grape prices are still upside down."

Had been generics

What are now called extreme value wines once were generics in bags-in-boxes containers, said Stallcup. Now they are varietals, primarily from the Central San Joaquin Valley in 750 ml bottles.

And the price war will not subside anytime soon, he said, predicting 99-cent wines will soon appear in the increasingly popular "99-Cent Stores."

Extreme value wines have created perhaps the biggest challenge for premium wineries on the North Coast. Some have had to lower their prices to compete or go broke.

Others, like Rodney Strong Winery in Sonoma County, have decided to maintain price and differentiate itself on quality, said Strong chairman and CEO Joe Klein.

Klein admits that 2003 was a "brutal market" for premium wineries partly because of extreme value wines as well as a floundering economy. He said the winery cost for the retailer was more than the grapes cost in the bottle. That is a far cry from a few years back when wineries could only make money.

"The late 1990s where the most phenomenal years we have seen in the wine business. We will likely not see those years again," said Klein.

Klein, like the other panelists, recognized that the economy is rebounding and opportunities will increase for wine sales.

Klein supports sustainability of the extreme value wines. However, Strong, said Klein, has pledged to "stay the course" in offering quality, differentiating itself with "compelling quality."

‘Special’ vineyards

The quality will come from "special" vineyards sites where growers can develop exceptionally flavorful grapes. Strong grows 50 percent of the grapes it crushes and buys the other half.

Klein said Strong is evaluating all its grapes and the wine from those varietals "block by block." Those vineyards not producing differentiable quality grapes will be rejected.

"It is more difficult to make good wine today," said Klein, but Rodney Strong Winery has decided to work at achieving that in the vineyards.

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