Thursday, January 07, 2010

2010 won't be a smooth start...

2009 was a really rough year for the wine industry.  While early indicators show that wine sales will be up (in volume and dollars) over 2009, the sales generated per case fell for nearly every domestic winery and imports suffered from trying to maintain already sensitive price points (thanks to the weak dollar).  Every winery owner or sales manager that I talk to tells a similar story:  distributors are focusing more and more on the big guys, even to the point of allocating time and effort based on how much revenue each suppliers provides for them, and retailers are asking for more and more aggressive pricing.  One general manager told me “every time I offer what I think is a killer deal, somebody comes along and beats it”.  Many distributors are already reviewing their portfolios based on Q4 (Oct-Nov-Dec) performance and will be booting those that don’t cut it.  They will in turn move to smaller distributors and so on until, eventually, some are left out in the cold with no wholesale distribution at all.  They can go rely on their tasting room and club business (and try to prop it up by Facebooking and Twittering like everybody else), but I hear of wineries who have lost 50% of their retail business….ugh!

Wineries have survived for 15+ months on the strength of their balance sheets (and some are not as strong as others) and have drawn as much as possible on their bank credit lines.  The piper is drawing near and he wants to be paid.

Banks are caught in the middle as they have (quite honestly) allowed wineries to borrow more than they should.  Now, the more aggressive banks are caught with loan portfolios that are full of over-valued wineries with bloated inventories on the books for more than the wine will sell for.  If they move on one to foreclose, they risk being forced to write down the value of other loans.

Owners, meanwhile, are looking to sell like never before.  The problem is supply and demand – sellers are abundant and buyers are biding their time, waiting for better prices.  A drop in price, however, will often mean that the owner walks away with nothing once he’s paid back the bank (the one that let him borrow too much in the first place). Historically this is where we would see the larger players of the industry (Constellation, Gallo, Jackson, etc) stepping in to snap up desired properties as they came on the market.......however, even those keenly honed teams are eerily quite at the moment. There is enough unease about where we are in the recovery cycle to make even the biggest predators pause for thought. It's somewhat like seeing a bleeding man in the water, yet the sharks not only aren't circling, they're nowhere in sight.....
All in due time, it WILL happen, just not while those larger wineries still can't forecast where they'll be in a year.

Napa is particularly feeling the pinch as they've been raising prices to the point where everybody and their cousin has a $125 Napa Cabernet offering.  The problem is that consumers have been drinking cheaper Cabernet in the last year and they’ve found out that Napa is overpriced.  Generic Napa Cab isn’t worth $40 and the good stuff isn’t worth $125. (I was talking the other day with a wine newbie who wanted to know what the production cost difference between $20, $50 and $125 bottles of wine really was: the difference for the $50 bottle is $30 of "ego" I said, and the difference between the $50 & $125 bottles is an additional $75 of "stupidity"....). Now, everybody (and their cousins) will be forced to discount their precious juice to half price and now they don’t have the case inventory movement to buy the new French oak and pay the exorbitant prices they’re paying for custom crushing in a Napa facility, not to mention the $35 they’ll need to come up with just to package and bottle a case!

So what will 2010 bring, widespread panic?  Cabs and Dolcettos sleeping together? (sorry, that was just plain bad)

I suspect we will see the wineries who got in last get out first, unless they have pretty deep pockets.  Banks will have to move in some cases, and opportunistic buyers will snap up some real deals.  Prices for vineyards, grapes and wine aren’t likely to rise, so some will be forced to sell and there will be some bankruptcies, even some prominent ones.  The good news is that the thinning of the herd is a good thing for the long term, even if it’s painful for some in the short run. For the consumer who can afford wine (and hopefully that's still a large percentage of those who were buying two years ago) the discounts will continue.......

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Blogger Vinogirl said...

Grape prices were very depressed last harvest and wine prices haven't seemed to have gone aren't some producers going to make a bigger profit? Just a thought.
Can you expand on the cost of custom crush facilities, perhaps a post dedicated to them? Just another thought.

January 07, 2010 9:27 AM  
Blogger Nicolas and Elizabeth said...

I think you are right on. It is not impossible also that someone could come from left field and build a wine company from scratch. There is a lot of money on the sidelines out there.

January 07, 2010 11:47 AM  
Anonymous Jason said...

Wine prices haven't seemed to go down?!??!

Where do you shop? I can't go in a store without finding a crazy deal. I bought more wine than I can possibly drink last year just because I couldn't say no to deal after deal....

January 07, 2010 2:16 PM  
Blogger Vinogirl said...

Well, maybe because I mainly buy from the wineries I like (and take advantage of an inter-winery discount), that I don't see anything discounted. But I do shop at JV on the Silverado Trail and haven't seen any bargain basement prices there either...I mean, I wish the Black Bart's Bride Viognier was discounted, it's be my everyday white right now!!!
Why do you ask Jason?

January 07, 2010 6:03 PM  
Anonymous Anonymous said...

Vinogirl- Remember, the wine (especially the Napa Cabs) are 2 or 3 vintages back when Grape prices were at all time highs (many of those growers had difficulty selling their grapes if they didn't have long term contracts this past year). It's crazy that many distributors and restaurants are making more money than the some wineries right now...wouldn't we all like to hear some positive stories for awhile - got to be something good out there.

January 07, 2010 8:44 PM  
Anonymous Anonymous said...

This all seems like a pretty good cleansing of the excesses. Nothing to worry about. I think that the people writing about the industry have exagerated the issues.

If everything that the writers were saying were true, then Napa grapes would be $1000 per ton. French barrels would be $30 a pop and you could buy an acre of vineyard land in Napa for $3000. None of that is happening.

No collapse, but a cyclical correction, but I guess that doen't make for interesting reading.

January 08, 2010 5:21 AM  
Anonymous Anonymous said...

The larger picture is a glut of marginal, monolithic wine on the global market. How long before consumers are done with Argentine Malbecs? Also, many producers with clogged, high dollar, inventories are coming out with lower-price, appellation wines to keep them financially afloat. Hopefully this will help stabilize broad market pricing beyond the recession.

January 08, 2010 6:23 AM  
Anonymous Christian Miller said...

Current grape prices are somewhat disconnected from current bottle prices because the grapes harvested in 2009 won't hit the stores as wine until late 2010 to 2012 (depending on the variety). In addition, this last harvest was peculiar in that demand on the spot market plunged in some regions/varieties even though the supply had not grown in excess of forecasted demand. It will be interesting to see if the bulk market "corrects" for that later this year.

January 08, 2010 8:05 AM  
Anonymous Anonymous said...

I work for a premium Napa winery, one that would never consider putting our prices down, we have an image to maintain and we sell out of all our vintages anyway, (it is a nice [and smug] problem not having library wines.) When our 2009 CS is released 3 years from now we will be making even more profit because we kick ass tonnage last harvest.

January 08, 2010 8:45 AM  
Anonymous Anonymous said...

Bulk market correction...does anybody have any idea of how brokerages are doing: Mancuso for example?

January 08, 2010 8:48 AM  
Anonymous Jason said...

To one of the anonymous posters - you could have gotten Napa grapes on the spot market for less than $1,000 per ton last year, weren't you paying attention to the signs on highway 29 that said "Cabernent for sale?" Never seen that in 40+ years of living here.

Vinogirl - discounting and trading down are rampant, if you're only getting interwinery discount, you're paying too much. Every week I have a new deal from a winery selling only to employees, family and friends that's at FOB or wholesale prices. Also, walk through Safeway sometime and look at the deals....crazy.


January 08, 2010 9:02 AM  
Blogger Vinogirl said...

Jason, email me a list. I would love to take advantage of the bargains you are finding :)
And yes, Safeway has some great prices and a fair selection of wines...but I don't always want to drink Pepperwood Grove Zin or Red Bicyclette Chardonnay...although I sometimes do :)

January 08, 2010 9:21 AM  
Anonymous Anonymous said...

I think you are all going on about two different sectors of the wine market here, the cheap end versus the luxury end. There will always be a vast difference between the two. Nobody here seems to be getting it. Those who could afford Latour before the economic downturn, can still afford Latour now.

January 08, 2010 10:20 AM  
Anonymous Jason said...

Anon: I don't agree. I think Napa is overpriced and is in for a structural change. If you don't see it, you haven't been to any of the many on-line discounters lately. Some surprising names showing up there.

I don't think anybody is talking about Latour.

Vinogirl: Surely you didn't miss out on Beringer's big sale last fall? I bought 2005 Cinq Cepages for $16....

January 08, 2010 12:40 PM  
Anonymous Anonymous said...

I work for a bank (which shall remain unnamed). We have about 25% of our portfolio in wineries and vineyards. I can say that I higher percentage than ever before are either delinquent or currently outside of a covenant. The article captures what I'm seeing pretty well

January 08, 2010 8:54 PM  
Anonymous Anonymous said...

Vinogirl, how do I get that inter-winery discount?

Jason, how much was their white zinfandel going for then?

January 09, 2010 9:22 AM  
Blogger Vinogirl said...

Jason: Ch. St. Jean's 'Cinq Cepages'?

January 09, 2010 9:28 AM  
Blogger St. Vini said...

Anon @ the bank: exactly what I was trying to encapsulate. Most people I am talking with are seeing similar events unfold.

Vinogirl: Ch St Jean is part of FOSTERS wine group (as is Beringer, Souverain, Meridian, etc). All one big (somewhat dysfunctional) happy family!

Christian Miller: I think the bulk wine market will have no option but to "correct" as nobody will be likely to put out the same amount of cash as they did a few years ago. It's a buyers' market for the near future....
As for the spot market prices, my take on that was the buyers were getting skittish with the economy in upheaval. Companies that might have bought long in the past decided on a very conservative approach without any positive indicators, many intentionally going short from their plans in an effort to make sure they weren't over exposed.

January 09, 2010 1:41 PM  
Anonymous Anonymous said...

Great posts. Napa Cab at $80-125 a pop will surely see a hit. Those who deny this are either lying or aren't privy to the Winery's balance sheet or P&L.

Although sales at my winery are somewhat flat (up 4% net from '08), my wine club was up 27%! People aren't cooming out, joining the club and sending a case back home, however they are joining clubs they like and taking a few btls for the hotel room or dinner that night. They're going home knowing they've got good quality, small production wine coming to their home.

The tourists are kinda doing their R&D on us wineries.

As far as kissing ass (or giving it at 50-60% off) to the distributors or wholesalers... nah. I'd rather drink the excess myself or give it away and create good will. DTC is the future.

January 13, 2010 10:20 AM  
Blogger St. Vini said...

You're right!
DTC (direct to consumer) is the way of the future, once Uncle Sammy figures out how to make sure he's getting all the tax $$'s he thinks he should be getting. And there's nothing like handing someone a bottle they weren't expecting and watching their eyes light up....

BY far one of the best ways to create a lasting positive experience for them.
Which raises a good point: I have been by many tasting rooms only to find the staff too hurried or flustered to give the customers decent attention. If the staff is confident and has the leeway to give a free tour where otherwise they're charging for them, waiving the "fee" in the tasting room, etc, these things go a long way to making people feel welcome.
Pretty much any way you can make them feel like you are paying special attention to them is time well spent, after all they're taking time out of their lives to visit you.

Sadly, many bean-counters can't fathom the value of such "intangible" benefits like "good will" created....

January 13, 2010 3:03 PM  
Blogger Dr. Dean Brandon said...

What a great blog! The economy is tough for everyone. Anything viewed as discretionary spending will be delayed, price sensitive, or purchases forsaken altogether.

Winemaking has a built in time lag with vintages not coming online till some years after the harvest. What will the market be in 2 or 3 years? For now anyways, lower prices=sales. Some prices should say put if the product hopes to be seen as "worth" having. That's a hard call as you say, most wine is just fermented grape juice-with tons of image and ego thrown in. Pus the wine distribution system is dysfunctional. More direct to customer sales I say!

I am a little worried as I am just now considering making a few barrels of custom wine next year-I doubt the market will be much different when it goes on sale. Also, the price of production for higher quality low production wines is pretty high. Still, I have to be happy with the product. Who has a crystal ball?

January 16, 2010 9:16 AM  
Anonymous Anonymous said...

Last October I bought 60 gals of a Paso westside Syrah,363 clone, in french oak 20 mos. for $5/gallon. I expect I'll do that again this coming fall.

January 25, 2010 8:00 PM  
Anonymous Jason said...,0,3672344.story

February 02, 2010 9:19 AM  

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