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?"

A word about the economy

"Prosperity doth best discover vice, but adversity doth best discover virtue."  - Francis Bacon

"A penny saved is a penny earned."   - Benjamin Franklin

Ok, so this is more about saving money than the economy in general. Actually, I'm still dumbfounded that it's taken an economic crisis of this magnitude to really put the brakes on sales of top end tier wines. Were we as a society really all that happy about ourselves going out and buying wines at prices ranging from $100 to $1000+ per bottle?

Was the wine really that much better than a $45/bottle wine, or were we "compensating" for something?

People are dropping the higher end wines from the shopping lists, generally, in favor of lower priced relatively "bargain" wines, and the results from near and far afield are a boom in the sales of the remainder of the market. This isn't the end-all indicator of the economic turn around, but hearing that the CA wine industry has boosted its shipments of wine by 15 million gallons in 2008 is a sure sign that people who are drinking wines aren't stopping their consumption, just looking to drink those which "fit in" with their new budgets. And it is an interesting difference to see three main EU players dropping in market share while upstarts like the Californians and Argentinians shoot upwards....

Sadly, this also comes at a time in the EU where the wine industry has been under attack in France(!), by the French themselves. In the past decade, French legislators and firebrands have changed the wine consumption habits of its' people directly via laws restricting advertising, and indirectly through cultural campaigns to curb drinking period. This has been a huge contributor to the French producers' angst and has no doubt helped them to get themselves into the rioting mood these past few years. As the French Giant has nodded off, Italy has passed France in wine consumption, with the US now nipping at its heels. In a way that shouldn't really come as a surprise given that there are ~3 times as many Americans as Frenchmen, but with the US consumption of wine only a paltry 8.7 litres of wine in 2005 compared to the French per capita rate of 55.8 litres that same year it is quite a feat! Converted to cases of wine per year, the US would be slightly under one case per person in 2005, while France was at nearly 6.2 cases per person annually.

And that's not too bad of a deal when we look and see that 2008 had an overall drop in global consumption of almost 1% of the previous mark in 2007...

It will be interesting to see how long it is before the high-end tier recovers once the economy does get its legs back under itself. 

Of course at that time we'll see what happens to the lower end of the market as well, but hopefully people in the US are continuing to embrace wine as more of a necessity than they have in the past. Even if they are at a price-point they thought they couldn't/wouldn't like as much...

Beware rising wine prices

I can't imagine anyone still buying super unleaded these days, much less imagine someone buying 38 gallons of it at the same time.......but here it is: the $159 purchase!
Maybe some kid in his new 4x4 thought he'd get a better burn with that higher octane stuff...
Sure as hell wasn't me, as the only things I've ever driven with a 40 gal tank are tractors and vineyard trucks. But that leads me into the next topic: what's gonna happen when diesel hits $4.20 per gallon?

Be ready for increases in the prices of all goods, but I think you'll see that the vast majority of wineries will hold their prices steady for the short term, as most are already structured with their prices well above their cost of goods. That's not to say they don't feel this impact - they do - but they should be able to hold steady for the short term, barring any higher records for a barrel of crude oil. The exceptions to this will probably be for the truly small Mom & Pop wineries which really just scrape by anyways, and the public traded wine companies which have hungry shareholders wanting to hold onto their dividends if not increase them.
Of course, I've gone on record before as stating that wines don't cost nearly as much to make as wineries want you to believe (see this link about Coffaro winery) and how that plays into the image they then market to consumers, even so, there are many wineries which keep their prices down who will not have that extra padding to absorb the fluctuations in the fuel prices...

The problems for the smaller family wineries is one of "where do we get the money for the fuel increases", and it's likely they'd need to raise prices or sell out (not likely that fuel prices will retreat far enough to get them back out of the red), but they may do OK if they have a higher-end flagship or specialty blend they can market for extra bucks. The problem then becomes one of how much of that specialty blend they can possibly produce, and what the market saturation point is.

On the other hand, most of the really large wine companies are already structured to a position where they can more easily move revenues around to keep up with fuel prices, but will see a higher demand from their investors who want to make up for failing portfolios from other market segments which currently are tanking. Couple that with the continued talk of recession (gasp!) - even by the head of the Federal Reserve, and our gutless President Bu$h who strangely DIDN'T see this as a potential problem only a month ago - and you'll see investors start to harp on their "safe" stocks in large wine companies to get them more scratch.

There will still be people who drink outrageously priced wines, and I hereby donate my allotment of Kristal to the likes of the debutantes whom do so (Britney & Paris, do you hear me?)....
But I think it unlikely that those segments of our industry will see growth in the near future...I think the mid range part of the market will make gains as people who otherwise might take vacations don't, and hedge that the economy is likely to drop further before it gets any better.

KY's slippery slope (and wine)

No Sunshine, not the jelly...think "KY" as in "Kentucky", the state...and I'm referring to their position on internet and telephone sales...

This released by the Courier-Journal's online site:

"State regulators opened the door to shipments from small-farm wineries -- both inside and outside Kentucky -- when they unexpectedly decided to drop out of a federal lawsuit over the issue late last month.

The decision means that 43 licensed wineries in Kentucky are now able to ship wine to customers who place phone or online orders. Small wineries in other states will be eligible to do the same, but the state Office of Alcoholic Beverage Control hadn't received any applications for licenses as of yesterday [2/6/07]."

Now that's great news for Kentuckians, and great news for those small wineries within KY. And funny, too, that the KY Dept of Tourism [kytourism.com] only lists 22 wineries, not 43...maybe some of them aren't producing currently?

But overall it's still some bad news for KY as a state, as we see in the phrase used above "small wineries".

Why? The news item continues:

"To be considered for a shipping license, a winery must produce no more than 50,000 gallons of wine annually."

So it's bad news because all the big playa's (>50,000 gallons per year) with the deep pockets and departments full of tort-hungry attorneys can sue the state for not giving them equal access. So while they may have bought time by opting out of appeals of the current suit, they have much greater jeopardy to face when larger producers like a Gallo, or a Constellation, or ANYBODY for that matter producing more than 20,833 cases a year takes umbrage (I guess in this case size really does matter...). A larger-sized company would barely notice the costs of taking on the State of Kentucky. They're now out of the frying pan, and into the fire, so to speak.

As it is the Wine and Spirits Wholesalers of Kentucky (co-defendants in the case) are going to continue the fight, but won't seek to have shipping of the internet/phone sales blocked during the appeal of the judge's ruling back in December which declared the law unconstitutional - even though their pals at the state had argued that striking down the law would allow people in dry counties (good Lord - some still exist outside of Arkansas, Texas and Georgia?) and minors to skirt the law.

Sound like familiar arguments? Guess the State didn't think they had much of an appeal with just those tired points to be made again and again....

Too bad they didn't think far enough ahead to avoid opening themselves up to possible action from the Big Boys with Big Money. Maybe after they really get their pants sued off they'll realize that the access has to be across the board to all producers - regardless of production size.