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2 new reports paint painful picture for Calif. wine

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Silicon Valley Bank is out with their annual State of the Wine Industry Forecast and Recommendations, and it makes for sobering reading. It begins with an understatement:

“The attitudes and preferences of the U.S. taxpayer and wine consumer are in markedly different places today than they were a year ago.”

Then it cites a veritable witch’s brew of bad news:

- 4th quarter of 2008 was “the worst in memory for the fine wine business.”
- depressed restaurant sales, higher unemployment and foreclosures and lower consumer spending will continue through 2009 “as we seek a bottom.”
- wines between $40-$125 are in a “dead space.”
- winery sales “at bargain prices” are to be expected.
- Most scary of all, “Distribution has all but ended as a viable sales channel for small wineries.” (Which is exactly what I said last week.)
- Meanwhile, “credit markets are nearly frozen.”
- The secondary market for collectible wines has softened. (What?!? You mean you won’t pay me $10,000 for my bottle of 2001 Screaming Eagle?)
- And between the drought and sin taxes, whatever wineries are still standing will get hit with a double whammy.

Well, it could be worse. California hasn’t fallen into the sea following a 9.7 earthquake on the San Andreas Fault. Yet.

In this toxic atmosphere, it comes as no surprise when the report states that “Central Valley suppliers [are] the most optimistic and Napa and Sonoma suppliers [are] the most pessimistic.” That’s because all anyone can afford anymore are jug and box wines — fortunately, for the economies of San Joaquin and Madera counties.

But wait, there’s even more bad news. Small and mid-sized family wineries are facing “capitalistic Darwinism,” a dog-eat-dog fight to the death from which the weak will not emerge. The report’s recommendations are not surprising; they’ll be familiar to regular denizens of the wine blogosphere. Wineries must

- keep prices moderate
- get better at Internet direct-to-consumer selling and e-marketing. In other words, develop a “digital plan.”
- contain costs

Meanwhile, the Sonoma County Economic Development Board has a new 2009 Wine Industry Insider report that echoes the Silicon Valley Bank’s gloomy forecast. Among its findings:

“The spread of economic weakness around the world creates a
disadvantage for Sonoma County wine exports to top international
markets and will expand import competition here in the U.S.”

“Consumers are shifting away from high-priced wine purchases; high margin on-premise sales, such as those at restaurants, fell sharply… Wine drinkers and retailers are shifting to value, putting downward pressure on wholesale wine prices for local wineries. Some wineries are adapting to the shift by upping production of lower-priced wines.”

“The outlook for the Sonoma County wine industry in 2009 is for limited unit sales growth and the continuation of consumers’ shift toward value from high-priced wine purchases.”

Tough times, but good for wine consumers — if they have any money to spend.

P.S. I’m taking a few days off. I may be able to blog from the road — not sure. Check in, just in case. If not, I’ll be back on Monday.

  1. “Small and mid-sized family wineries are facing “capitalistic Darwinism,” ” – This is one that I’ve been hearing quite often lately, in the form of “there are only so many consumer wine buying dollars and more and more winery products competing for them.”

    I’d say I might be in for a windfall bargain on (previously very) expensive CA wine… which I will take significant advantage of if the opportunity presents itself!

    Enjoy the time off, Steve.

  2. Part of the problem with the high end “dead space” is too many new wineries with aspirations to make ultra-high end wine appeared during an economic bubble. It seems like just about every boutique winery is top heavy with multiple $50 to $100 wines that, in reality, don’t differ that greatly from each other because the winemaking techniques and oak regimens are nearly identical. Meanwhile, they offer next to nothing at the mid-price level.

    If you look to the right importers, there are established French wineries from lesser-known regions that offer multiple cuveés. They don’t just have a $50 Cab, a $50 Merlot, a $50 Syrah and a $75 Cab-Merlot-Syrah like many California wineries do. It seems with French “boutiques,” the lesser wines go into the less expensive cuveés, and the best wines go into the upper level cuveés, and they don’t mess with this silly varietal portfolio like California wineries do. They do one or several things well, and that’s it.

    Cali wineries need to do two things: make good wines at several price levels and reign in costs. The latter will be hard since a lot of folks seemed to have started when land was expensive, but ultimately it’s not up to the consumer to absorb their costs stemming from a poor business model. But they can cut back on the expensive new oak and sourcing from ultra-expensive vineyards. Meanwhile, go back to the basics. Stop bulking out most of the wine at a loss so you can keep the best barrel out of every ten for the luxury cuveé. By all means, make the top end wine, but actually work to make a good wine at a fair price as well.

    This correction needs to happen. There are just too many wineries charging prices that only producers with proven track records over a decade (if not a century) should be able to demand.

  3. This is nothing new for me, being that I’m in the industry. What isn’t mentioned here is that not only are the under $40 wines that are selling, but those wines that have been overpriced for a decade are able to cut their prices and give people the perception of a great value. The reality is that they have been getting ripped off up until now. Those wineries that have kept their prices reasonable, are not able to do the deep discounts, so they don’t seem to be as great of a value. It’s a catch 22! All we can do, is educate educate educate! The power is in the consumers hands.

  4. Steve, I see that you are still painting with your infamous broad brush?

    “That’s because all anyone can afford anymore are jug and box wines — fortunately, for the economies of San Joaquin and Madera counties.”

    May I also observe that the last sentence of the second bullet point on page 6 of the SVB report may well be applied to veteran wine critics?

    Hope your time out has provided you a more positive paradigm.

  5. Carson Smith says:

    It is interesting that only a few years ago the same report by Silicon Valley Bank pretty much wrote off the San Joaquin Valley as a viable part of California’s wine business. We in the Central Valley were refered to as “the Detroit of the wine industry” in that State of the Industry report which painted a very rosey picture for the future of the upper end wineries and brands.

  6. If life hasn’t taught anyone this lesson by now, let me institute it here. Positivity lets you find the answers in problems, negativity helps you find the problems among problems. Do the times leave the wine industry finding it hard to remain optimistic? Certainly. However, difficulty in optimism doesn’t make it an impossibility especially when it’s a necessity. The wineries the are flexible and look for the bright side will begin to live on that bright side. Wineries that react by not reacting and sit on pricing structures like too-comfortable-to-rise-from-sofas will not be happy and only then will it have gotten even harder to remain optimistic.

  7. Morton Leslie says:

    For many producers cutting prices isn’t a solution. When you are paying $100 a case for grapes, $50 a case for a “name” consultant, $100 a case in debt service, $40 a case to Taransaud, $30 for that package with the 3 pound bottle and the 3 inch cork, $25 in labor, $10 for R.O., and $100 a case for living the appropriate high life of a winegrower. You need at least $75 a bottle retail price or you can’t make the payments on the RangeRover.

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