More layoffs for Sonoma County winery powerhouse?

There are several rumors circulating (with some very well informed parties providing me with confirming info just last evening) that there are more layoffs in the works for at least one major Sonoma County winery....

Ready to guess which?

• one which has already had a few large rounds of layoffs in the past 18 months...
• and has scaled back (mothballed & consolidated) a few of its properties recently....
• and has management which currently seems to know no other answer to flagging sales than to cut its workforce...
• management which also saw fit to raise the price of their main bread and butter product at the beginning of the recession...despite knowing the recession was on the way, and would negatively impact the next few quarters as their sales dropped due to the higher prices and the fact that distributors packed their warehouses at the lower prices, and then didn't deplete their stock like they had in the past.

Time's up! 
Put your pencils down, but don't worry, if you didn't guess you'll find out when it hits the paper...

*****

The continued trend of consumers not to "trade back up" from the lower priced tiers they have gone to in the past 18 months is contributing to many changes in our industry - especially regarding wineries which used to seem beyond the grasp of such trivial things as market fluctuations....

Many people have suggested that this is mainly just a matter of time, and that given enough time the industry giants will rebound to the same stratospheric heights they used to occupy. Though many readers of this blog in the past will know that I don't give the Titans the same respect they do, and for good reason.

I was lucky to have realized long ago how much of the current fluff regarding the hierarchy of wines & wineries is just that...."fluff". People (consumers), have "traded down" for financial reasons, but quite a few have found enjoyment at the lower tiers (~$15/btl) which they used to think only existed at the $30/btl range.

I really don't think they are ready to go back yet, and the wineries which aren't looking to price their wines at a price to move right now are missing the boat. Any talk of "not losing price point" (read that as "prestige" & "ego") is not really realistic. To be sure, many will weather the storm even with that attitude, but the healthier ones will be - in my opinion - the ones which make it through the storm without having to sacrifice facilities and product lines to get there. Witness the recent changes with Beaulieu and Sterling being sold/leased by Diageo....these are some of the previously "untouchable" storied wineries now leased-back to provide "nimble" and "entrepreneurial" business opportunities for the Diageo group.

The bad news for the producers whom are filling the market needs now will be expected by consumers to continue providing these $15 wines which drink like $30 wines for the foreseeable future.

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.......

More trouble on the horizon

There are many indicators that the recovery for the wine industry is NOT on the doorstep right now for some of the larger wineries. Normally, this time of year sees frantic bottling as wineries across the state try to get tanks emptied for use in the coming harvest. Not so this year....

Several larger wineries have suspended bottling of their wines off and on over the past 8 months. This is due to lackluster sales keeping the products in the warehouses instead of heading out to the consumers. If your warehouse is plugged full, you have nowhere to put the product. If you're going to have hold wine in a warehouse due to slow sales, the rule of thumb is to avoid the extra expense of putting the wine in the bottle in the first place. This saves the headache of needing to either decant the wines for bulk wine sale or remove the labels at the very least for another winery which might buy your wines from you to generate cash flow.

Some of the larger wineries I know have crews which are near panic, as they turn the proverbial spigots off and on again to drain tanks for the coming harvest. Also, there's only so much cleaning you can do when you're supposed to normally be bottling. Then there's a cascade effect as the wines normally to be trucked from one place to another no longer need to be shipped - so more truck drivers stand idle, and trucking companies start hurting. Wines no longer on the fast track to the bottle don't need as much work done to them, so the cellar crews start looking like they have too many people on them to the bean-counters, and discussion starts about cutting them back or temporarily having them work only partial weeks (if not to lay them off entirely until the next harvest starts). Lab analysis also is put on a back burner, so testing companies like Vinquiry or Enologix might be seeing reduced work loads. Then there are the companies providing labels, bottling glass, glue, corks, capsules, etc....all of which also feel the pinch from the lack of forward momentum on the bottling lines.

And it goes on from there....

The problem is that tanks should all be emptied for the harvest which has already started, and winery management will be trying hard to minimize capital outlay for bottling, while they create space needed for the incoming fruit. It is a very delicate balance to maintain, and requires a great deal of communication between the vineyard, cellar and the marketing teams.We all would have been better served by Nature if the current harvest was a bit smaller than normal, which it isn't. The only silver lining to our plight is that the harvest may run a bit longer than normal, and we may have time to turn the tanks over for another round without having to "short vat" too much of the initial onslaught due to the hot weather we're having.

What's it mean to the consumer?

There are some wines being discounted, but that shoe is only now starting to hit the floor. The bigger concern is for the financial performance of the wineries. This is their "stress test", where we will learn if their high paid marketing and promotion staff are worth their salt. But they hold a double-edged sword, as dropping the prices moves more product, but cuts the amount of revenue they generate (doubtless they had more profits penciled into their business plans, and one thing owners and bean-counters abhor is the dreaded "write down" of inventory valuation). Another problem for large wineries is that almost all of them have tried to position themselves up-market in the past few years, and that's the sector which is hurting the most. All we need to do is look to the article in the Press Democrat today to see many of the higher end wineries feeling the crunch. The tone of the article is spot-on, but some of the concluding thoughts are a bit optimistic...

Fred Reno is right that this isn't a 1~2 year dip...and three years is a bit too short also. I don't see the high end ever fully recovering...well, at least not until the next generation of wine drinkers hits the market. And even then, that prospect is "iffy". 

I'd say it's more likely to be "near" to where it was before this mess started within a decade, but owners and marketers will have a tough time getting the same people to buy the highest priced wines when their eyes have been opened to great tasting wines at lower prices. I liken it to my grandparent's need to have "mad money" in their pockets after they survived the depression, or their need to have a well stocked pantry decades after the end of those difficult economic times ("mad money" was their name for the $20~$50 they always had on hand in cash for quick purchases - people told them they were mad not to put all their money back into the banking system, which was deemed "bulletproof" after the government regulations were in place). Even though the danger was long since removed, they had a difficult time getting their heads back to the spend-freely attitudes they had prior to the bad times. I don't see the current purchasers going back in that direction, not that the sales of Two-Buck-Chuck will always be booming like they are now, but they won't go back to buying wines priced as high as they had purchased in the past.

What - and wine sales are down in restaurants? Because people don't want to pay double the price they'd pay in a retail environment to get the same wine? Do tell!

People are going to be much more frugal as they come back into the market. Wine sales in the high end are seeing something that should've happened a long time ago: a correction to deflate some of the ego driven inflation that has injected itself into the process.

So what if someone starts a winery from scratch and wants to put the first vintage out at $100/btl? 

I say let 'em fail. It's not pretty, but if you're stupid enough to put wines out there at that price right now, then you are getting what you deserve to see them stagnate and not move at all.

After all, it's frickin' fermented grape juice, nothing more....so why were people paying those incredible prices to begin with?
If you're a winery owner or marketing type who asks me today what's going wrong with your business plan the first thing I'll ask you is, "why aren't you discounting more heavily?"

"Inglenooking" revisited...

I have been doing far too much traveling for brand promotion and sales these past few months. Sales are finally starting to creep upwards again though, so hopefully the recession is on the way out.

Anyway, I was looking through a list of "Top Wines form Argentina" while on a flight back to California, and was somewhat amused to see Inglenook as the #3 brand (Chablis, same wine is in the #13 spot as well).

Inglenook? Really??

I had lost track of that brand a few years back when it was still low-end California bulk wine. Anyway it still shows up in the #10 spot (for Burgundy), #15 (Chianti Classico), and finally in the #20 spot (Rhine). Not bad to have your brand in 4 of the top 25 positions....but even so, it is still extremely sad when you remember the rich heritage of the Inglenook name.

Inglenooking is a term used within the industry referring to a high-end brand which is then shifted down-market to capitalize on the previous successes. In the case of Inglenook, it was once the highest end Cab from Napa Valley, with the 1941 Inglenook Napa Cab having a perfect 100 score retrospectively bestowed upon it by the Wine Spectator. Bottles of that vintage can still fetch almost $25,000 each. (Yeah, that's right...$25k for each bottle!)

Now THAT's a brand....top of the Napa wine heap....or at least it was for a while....

It was relegated to California plonk as the brand was expanded and moved in larger format bottlings onto the lower shelves of the supermarket displays. Now it seems to have been further globalized by its corporate handlers...

France "dysfunctional"

Well, IT'S ABOUT TIME! 

Top wine industry insiders have labeled France (and Bordeaux in particular) as "dysfunctional".

I've been saying that for years....maybe they don't read the Zinquisition?

Highlights from the Vinexpo conference via Decanter.com:

'Bordeaux should be selling everything,'says Tony Spawton, an associate professor for wine marketing at  University of South Australia.

This is blatantly false...he's implying that just because it carries a Bordeaux appellation it should sell, but there are always less desirable wines from any locale, and just because it's Bordeaux doesn't make it GOOD wine...

'The fact the world's leading wine region is having to distill wine is a bad sign,' said Spawton.

What? They've been doing it for years...why wasn't it a bad sign back then? Weren't they paying attention??
C'mon, I've been blogging about the perpetual "crisis distillation" program and its ill effects since 2005....

Another speaker, UK wine writer Robert Joseph - who produces wine in France - said dysfunctionalities in Bordeaux, and France in general, existed at many levels.
He cited a 'lack of wine branding, poor marketing - with the exception of Champagne' - and the fact that Bordeaux customers are 'blackmailed' into buying.

No $hit...again, something I've been saying since '05...

Well, who knows. maybe they'll get their act together and finally move into the 20th century. Then they'll only have one more century to make up for to be on par with the rest of the world!
I've saved the best quote for last:

'The biggest change will be producers actually asking themselves who is drinking, why, and questioning the blind assumption that there is a market out there for this kind of wine.'                 -anonymous French wine producer

 Yeah, that would be a change for the better, wouldn't it?