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?"

Another weekend of frost protection

Saturday and Sunday morning's temperatures both dropped below freezing, causing me to get up at 2:30 Sat morn, and 3:30 AM yesterday. The problem with this time of year is the vulnerability of the young shoots to frost damage. Last year, I had the sad fate of having to use much of my irrigation pond water for frost protection. Since our rainfall was so short, I really didn't have that much water left for the rest of the growing season. Now some out there who think dry-farming is the best thing since the invention of sliced bread and processed cheese may rejoice, but from the farming side of the equation, this is a bad thing. For as bad as frost is, having your vines wilted by extreme high temps during the summer peak is bad too.

There is a benefit to those who have wind machines, and vineyards with those installed get to save their pond water for irrigation. What they've traded for is added capital budget expenses, and a system which only has one function: mixing the air in your vineyard to avoid frost. On the plus side, you save water, either from your own ponds, wells, or drawn from the Russian River. I had pushed for putting a few wind machines into the budget in the past, and more so last year after the short rainfall, but persuaded myself not to with the idea that there might be some cleaner technology on the way to power them, namely solar instead of diesel or propane. (This type of system seems a bit too "iffy"...and without being backed up by plugging into the main grid, or having a propane back-up, probably wouldn't allow me to get any more rest than I do now. Betting that the system would have stored enough electricity from solar energy in the winter months to be useful 100% of the time it's needed is not a bet I'd want to make. Hopefully the near future hold some solution which is a bit greener and sustainable, rather than rely on a fossil fuel driven back-up system.)

I hope that one day I can look out and see a wind machine which is powered by the sun, but for now I'll bet on having the water available for preventing frost damage.

Anniversary of the 1906 Earthquake

Here we are 102 years after the 1906 San Andreas earthquake which shattered San Francisco.

I hear some of you saying..."so what does that have to do with wine?"

Plenty!

But first- attached are a few stereo-optic photos taken right after the 1906 earthquake: notice how everything is pretty much gone (fires consumed most of the wood the quake spared), how the people are living in the streets, and how the then destroyed Fairmont Hotel was reported to have cost JUST $4,000,000 to construct in the first place! These days you can't even look at a lot the hotel occupies in SF for that much cash.
(Thanks to Stuart for sending these photos in...
Click on the photos to see a bigger version, and look at the center of the photo and cross your eyes slightly...and the photo should magically pop out at you...)

...and isn't it nice how the Keystone-esque cops are guarding the safes from the banks?...
And still more damage & people living in makeshift shacks and tents, with no water and no sanitation...(please note how the shack has a horseshoe which is placed the wrong way up for luck...)...
Again, how does this tie into wine?
One of the most common questions when I see people tour wineries is "what happens when there's an earthquake?"
It's usually asked as people are shown around barrel rooms - especially rooms which have the barrels stacked high above the tourists heads...and by people from back east, or at least people whom haven't experienced an earthquake or two.

Well, here's a video of what's possible when you take a stack of barrels 6-racks high and place it on a shaker table for a simulated quake. I should note that in my book, wineries really worried about this possibility use 4-barrel racks for stacking as they're much more stable than the 2-barrel variety are in earthquakes...notice how they fail in the front-back (linear) direction and not to the sides (laterally). (I didn't get any sound on the video...)

As you watch the video and look at the photos, think to yourself of how much it would cost to repair the damages from a quake in these current gloomy-economy times...I mean even the smallest mom & pop winery is worth $10~20MIL.
And even the cheapest house in Napa or Sonoma counties is a half-million dollars each....

Inventory losses for winery case goods alone could reach the $500MIL mark, as they're also stacked high and might be damaged in a quake. Tack on all the costs from damaged buildings, losses to equipment and lost time working the wines, as well as possible losses to life, and the place is pretty much a shambles. Transportation chains broken due to injured workers, damaged highways, overpasses and bridges, etc...
In fact, just a few spots of Silverado trail, highways 29, 12/121, and highway 101 being damaged would cripple the ability for National Guard relief to get through.
If there was also damage to the local airports, we'd be pretty much screwed for a week or two.

What is there for you to do to prepare?
Definitely put together an earthquake kit with all the food & water you'll need for 4~7 days, but also slip a few bottles of your favorite wines in as well...after all, you can't be sure when your favorite wine shop will reopen (if ever), and the comfort you'll get from having something as simple as a good bottle of wine will be priceless in a major event like that (you could also barter it for something else, should the need arise!).
[check out the ABAG website for additional preparedness info]

Shat would the total monetary damages be? The final number would vary greatly depending on the type of scenario that plays out, but it could easily be in the billions.
It might even approach the total from, say, a Katrina-type disaster, though the area affected would be much smaller in scope. But still the possible consequences of a strong quake scenario in the North bay area are drastic.

Trophy hunting season opens: rumor mill

With Beam sold off, acquisitions are now (again) the hot topic of conversation...
(In reality, they're always a hot topic, just usually invisible to those outside the industry.)

Rumors have persisted for the past few months that higher-end producers in Sonoma and Napa counties are eyeing deals that would have been heresy just a few years ago.

Apparently, the high prices paid for Screaming Eagle, Duckhorn, and Stag's Leap are being used as a precedent for the new round of sales, much like A-Rod's next contract (or that of any professional baseball player worth their salt) seems to keep skyrocketing on the news of the previous "record deal" set only moments prior...

Persistent and multi-source rumors are circulating about Pahlmeyer, Phelps, and Kistler...though how close to completion any of them are if true, what astronomical prices they're asking for, or who exactly the buyers might be is uncertain at this time...
I'd bet we'll see plenty of money change hands with the sale of any of those...
It's almost feels like it's opening day of trophy hunting season...

Viansa: talk is cheap, but the winery's gonna cost ya'

"VIANSA Sells for Double Net Worth"...

"Marketing Genius gets Owners Out of Bankruptcy"...

"LOOPHOLE Saves Family Winery"...
Great headlines, eh? From the local paper?
No...just a pipe dream that Jon Sebastiani and his mother Vicki are still envisioning for Viansa as it struggles out of its failed relationship with Global 360.

More news from Rich Cartiere's Wine Market Report about Viansa states that the Sebastianis (read as Jon & Vicki - no one else is named) are trying to get a Nevada bankruptcy court to sever their ties to Global 360, and then give them the equipment assets of the business...
(I don't think that's too likely to happen, but stranger things have come true...)

All totaled, the Viansa liabilities are listed at ~$57 MIL...that's over 160% what the winery sold for in 2005 ($34.5 MIL). Yikes!

Even more of a pipe dream is the figure that Jon & Vicki seem to think the winery is worth (and mind you they want everyone to over-value the business so they can soak some more cash out of it) which is between $45~$70 MIL!

You've gotta be asking yourself right now, "why the HELL did they ever sell the winery to Global 360 for $34.5 MIL if it was worth $45~$70 MIL originally?"
(PS - it was a bit overpriced in that sale 3 years ago, and what exactly has happened during that time to increase it's value other than inflation? Nothing. Nada. Squat.)

Jon Sebastiani, the one who started this whole tawdry affair by hooking up with Global 360 & arranging the sale of the cash-strapped winery in 2005, would have to be the one to answer that...

Good luck on this angle you're working, Jon....you're gonna need it!
Because there's still a dark cloud hanging over Viansa, and I don't think it'll dissipate anytime soon...

A close-up of the "Gallic Syndrome"...

I posted on it a while back, warning of what I think are signs that point to a similar situation to take place here in California - most notably in Napa...though it could strike anywhere when a few top end wineries get astronomical prices and prestige while the vast majority of very good producers see a shrinking market price, perhaps even lessened market presence due to imports which offer more consumer satisfaction, all the while prices for cost of living, land and materiels continue to skyrocket...
[Gallic Syndrome post]

You can somewhat see what the effects are in Bordeaux in the following article: A tale of two Bordeaux (SFGate.com)
As they say in the intro to the piece, of key importance is the struggle of the everyday producer to remain relevant...

"Although the region's top names are still able to command stratospheric prices, many of their fellow vintners have been left in the dust...Peter M. F. Sichel, who has been a prominent figure in the Bordeaux trade for the last 40 years, believes that money has distorted the market. An increasingly wealthy upper class from around the world is pouring money into the market for top names and virtually ignoring smaller properties.

"There are really two Bordeaux now," Sichel says. "One hundred or so chateaus (less than 5 percent of all properties) are doing exceptionally well, and everyone else is struggling." "

How have they fallen flat?

By NOT simplifying their AOC system, adopting varietal labeling, and by NOT figuring a way to brand themselves as a group outside of the 1855 Classification system...

Meanwhile, the top end producers - a group smitten with the 2000% price increase in some of the top priced wines over the past decades - allow avarice to dictate wild prices even when the harvest is of lesser quality (as was 2006 vs 2005)...

This all ties into where Napa is headed. More castles, micro-cru producers with wads of cash from other sectors driving land prices thru the roof...all just to make their individual 500 cases of cult wine which the average Joe would never be able to purchase. And while we don't have many of the problems the French do have, the path into the same trap appears to be well under foot right now, and we - much like the French already have - seem to be embarking on a trek that will split the industry into those who can get $500/btl, and those who cannot...

As they say, the path to Hell is an easy one...

Of course, this will lead to bargain prices for those US companies which can import French negociant wines (notably Pinot Noir) in bulk, bottle it here, and bring it to market for far less than the French producers can themselves...and...

...AND avoid the problem France faces by bottling it in a region where varietal labeling and branding are "old hat".

India & China: wine consumption to rise

I have posted a few times regarding the economic boom that China and India will bring to bear on the future world wine industry, and the economic news continues to reinforce that idea.
Below, I've included links to several articles which speak to this topic - and after reading, may just persuade you to pick up a few courses on "How to Speak Cantonese" or Hindi...

The recent news points to the day in the future - maybe near 2024 (a year of the Dragon) - when China and India will make up quite a large bloc of the consumer market (India predicted to be fifth largest consumer nation by that time, and if China plays it's cards right, Beijing might take a spot in the top five also. And with plenty of banking infrastructure (4 out of the top 50 largest banks in the world are Chinese institutions in Beijing already), will probably have no trouble continuing to fund it's massive growth rate...

Anyways, I've digressed a little: what's this all mean for the wine industry? Plenty...

Asian nations are already smitten with the trappings of traditional Western success and status, most notably wine. One interesting article points out that in China, well-to-do entrepreneurs seek out high priced wines and serve them at various functions - even if they don't like them and they don't match with the cuisine (this applies all the way up to State sponsored functions).
Olivia Wu (5/7/07) stated that Cab Sauvignon is the most popular varietal in China due to the impression that "it is the most revered of the noble varieties". She also noted that much of the wine consumed in China (this is true for India as well) is mixed with soft drinks as a sort of ad hoc wine cooler - which I have pointed out before. Obviously, this would change the Cab quite a bit, and the lessened tannic profile and increased sweetness would help the wine pair with the local cuisine, which often tends towards spicy and sweet characters.

Looking at the numbers for their population, the future is obvious: China has roughly 1.314 Billion people, of which 20.8% are under the age of 15, and India has a population of 1.112 Billion, 32.1% of which are 15 or under! Talk about a large influx of potential consumers!!!

The links:
Aussie exports to China now at 164% of last 12 months (China still roughly 10% of Aussie-US export volume)
Michel Rolland working with wine in Bangalore
Luxury brands ignite interest in the Chinese market ("I'm drinking increasingly expensive stuff. At first only 100 or 200 yuan a bottle, but now up to 1,000 yuan [~$130 US/btl]," said the smartly dressed businessman...)
China to replace US as World's most important economy
India to become fifth-largest consumer economy by 2025
Indian Middle-Class ready to burst forth

Wine investing goes Gen-X, Millenials

Not all cartoon shows will trigger Homeland Security exercises like the one yesterday in response to 5 magnetic marketing signs from Cartoon Network/Adult Swim in Boston. And, thankfully, not all cartoons are based on talking fast-food like Aqua Teen Hunger Force and its Mooninites from the planet Skyron in the galaxy of Andromeda...which is a really weird premise to start with.

But some other cartoons may actually help the wine industry, albeit in a round-about fashion.

I don't think that the future will see everyone investing in the wine futures market, or all out collecting, but the trends are pointing to an increase for the number of "common wine investors" - meaning those whom don't have a huge portfolio, but rather pick up a few cases of "collectible" wine here and there as speculation. Also, the concept is starting take hold in the next generations of wine drinkers: Millenials and Gen-Xr's...

I think this is obviously will be due to the good press that wine investing has received over the past few months, including the news that it is independent of the main market flux (and therefore the implication is that it is more secure, or at least a good choice for diversification). Also reported is the idea that prices for hardcore investors of those already hard-too-find vintage bottles will start to climb faster than before - which, while aggravating to some - should increase the overall value of the stash of collected bottles. Perhaps the smaller collectors (I should call them speculators, as they won't be into the market in a significant way) will pool their resources and form small groups to increase their buying power.
My advice for them: Buy what you can, and hold.
But beware of buying wines you wouldn't like to drink yourself though, even if they are valuable, just in case there isn't a market someday you can still get some enjoyment from your purchases.

Has it really gone mainstream? Perhaps not yet, but it's making some more significant inroads than in the past...
Even Japanese cartoons are now being written around the subject...the above still is from an episode of Ghost in the Shell: Stand Alone Complex (2004) called "Angel's Share", where the main characters are entangled in an attempted heist of a warehouse where wine collections are stored. One of the scenes shows a reflection of the female heroine (above) window shopping for a Laguiole corkscrew and a bottle of Romanee-Conti wine (vintage unknown).

It's doubtful that many kids would be watching this cartoon, as it appears to be oriented towards more mature audiences, but there are many fans of the Japanese manga anime cartoons who may be more likely to invest in a bottle of the stuff after seeing the cartoon. And certainly in Japan the concept of wine collecting is also seen as a status symbol, much as it is here in the west.

Reportedly, the cartoon also repeats some of the old misleading myths about wine aging: that ALL wines increase in value when aged, that wines can age forever, and that all wines are improved by decades of aging...sadly they couldn't cull those old wives tales from the production.

Thanks to stuart for the email & screen-shot.