Thursday, March 10, 2005

The Ever-Changing Wine Market

After three years of oversupply, the California Bulk Wine Market (think of buying and selling pork bellies, only the pork bellies are held in stainless steel tanks, contain ~13.5% alcohol, and aren't traded on an exchange (other than that, they're identical)) has literally "turned on a dime". With no new vineyard plantings in recent years and two light crops (2003 and 2004), the oversupply has quickly flipped to an undersupply. While many producers of negociant brands (those with a label only, no physical winery home) have many fortunes in recent years, that may end much more quickly than many had thought as the demand for bulk wine supply drives prices up to levels that become uneconomical for these type of producers.

Although Barefoot's sale to Gallo last December seemed rather abrupt, it was, in reality, a savvy move by Michael Houlihan, Barefoot's owner. He knew that 2005 would be a year of thin margins (he wouldn't be able to raise his prices against supply-integrated companies like Gallo, Wine Group, Constellation, Beringer, etc. and would be paying more for his supplies) and got out while the gettin' was good. One would imagine that other negociant (or "virtual" brands) like Smoking Loon, Castle Rock, etc. will be bailing out soon or taking a very painful price hike.

What does this mean for the consumer, you ask? Those who have enjoyed many of the deals in the California wine marketplace lately will see a gradual increase in retail prices. I'm not talking about just the sub-$10 negociant brands but also the heavily discounted deals from most all California producers.

What's interesting is the way this actually works.... For example, winery A has been selling its Napa Chardonnay at a price that will hit $15 retail to the consumer. During the last couple of years of slow sales and price competition, the winery hasn't actually lowered its prices to $12, but has instead given discounts, credits or just free cases to retailers and wholesalers to allow them to bring the retail price down. This way, when the oversupply eases and market forces allow retail prices to come up, the winery doesn't have to "raise prices" to wholesalers and retailers, rather it just eliminates the "price support" given to them.

Every time you scan your grocery club card, for example, the grocer sends a bill back to the winery for the $1 you got taken off the price of your wine purchase. For the grocer, its a win-win since they don't do anything except look good by bringing you lower prices. For the winery, they take it in the shorts.....


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