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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