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Where are price points going?

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Nothing gets a good debate going in wine country like the issue of pricing. Is the high-end super-ultra-premium bracket busted? Will $60 Cabs rebound? Is there an end in sight?

“No,” seems to be the response of the Henny-Penny segment of the market, and there’s evidence they’re right. My friend Scott Carpenter, who publishes The Broad Market Report, headlined yesterday’s issue “Price Points of No Return?” and quotes numerous retailers to the effect that prices will never rebound to previous levels, even when and if the economy improves. Then there are the anecdotes about formerly expensive Napa Cabs being seen in the likes of Costco for $40 or less.

Of course, it’s impossible to know who’s hurting in wine country, since most wineries are privately held. The consensus is that the older wineries will get through this, since they have less debt. The threat to the scores of newer wineries — many financed on borrowed money and heavily leveraged — is obvious. We haven’t seen too many sparrows falling to earth, yet — a few here and there — but, to continue the bird metaphors, there are canaries in the coal mine suggestive of the future. Today’s Napa Register quotes the owner of Napa Valley’s biggest wine tour company, California Wine Tours, as saying the company is hurting as a result of the economy. “The luxury transportation market is usually the first to get hit,” he said. (He might have put wine auctions on the early-bird list, to judge by the Napa auction’s recent take.)

Even in Burgundy prices are heading south. “Burgundy wines, hit by a fall in U.S. and British demand suffered a 30 percent drop in first-quarter exports and a ‘more difficult’ year ahead is expected to lead to price cuts for the region’s finest vintages,” Reuters reported today. And in Bordeaux, “A third of appellation Bordeaux winemakers may lose their vineyards within a year” due to slumping worldwide demand, Decanter is reporting.

There’s a flip side to the doom-and-gloom scenarios. “Some wine country entrepreneurs see vine opportunities” in the recession, the Associated Press reported yesterday. With the price of everything from labor and building materials to wineries themselves still falling, “It’s a great time to be in the market,” said Bill Foley, who the article said “is looking at three or four deals a week.”

My guess is that the coming months will see many wineries changing hands. They will be family-owned, and will pass into the portfolios of larger companies, like Foley’s, or The Wine Group, Constellation, Gallo, Diageo and Jackson Family. I think we’ll also see newer formations of private equity galloping in and buying up failing brands. For example, late last month Walter Klenz, who formerly headed Beringer/Wine World, and some associates announced The Vincraft Group, which is assembling a portfolio of boutique wineries whose wines retail in the $50-$100 range — precisely the price point that’s most threatened, and which brings me back to those Costco bottles that used to be $100.

I can’t help but think that the industry is taking all this very seriously. Could it be one reason why members just elected Diageo’s Ray Chadwick as Wine Institute’s Chairman? Perhaps they felt his entrepreneurial understanding of how to move product through a sometimes resistant pipeline could aide them all.

  1. Great blog . . . and certainly timely as well.

    I can certainly see folks like Bill Foley VERY happy these days – as he builds his portfolio, he will be able to ‘cost average’ vs. the purchases of the likes of Merus he made in the last two years . . . He is going to be WAY ahead – assuming, as we all do, that he has the capital to ride out the current economic bumpy road.

    I have to believe that there are numerous ‘start ups’ and newer labels up in the North Coast that are getting absolutely hammered at this time – mailing list customers are balking at current prices; those on their waiting list, who before would have jumped at the chance of moving up, are now balking; retailers are being offered wines that before were NEVER offered at retail; restaurants are still sitting on inventory of higher priced wines that seem even more ridiculously high based on the current economic situation.

    Where to go from here? From a business standpoint, we are told ‘do not lower your prices because then you are ‘cheapening’ your product . . . But is it better to accept lower prices and keep the cash flowing . . . or ‘rest on your lorals’ and hope, against better judgement, that things will turn around sooner than later and you’ll be able to ride it out?!?!?

    It will be interesting to follow . . .

    Cheers!

  2. I agree that for the people who have a lot of capital on their side, things must be looking great.

  3. Morton Leslie says:

    I don’t see many super luxury wineries passing into the portfolios of larger companies like The Wine Group, Constellation, Gallo, Fosters, Diageo or Jackson Family. In many ways they are in the worst shape of all suffering from too many brands and inflated pricing.

    Buying a distressed brand from some else doesn’t automatically mean a turn around …though many buyers have the ego to think it will. The wine is probably not selling for a good reason, and if you think you can spark a $60 bottle price today with a sales force or a clever PR strategy, then good luck. “Let’s see, we buy Screaming Eagle for a cool 40 million then we drive up the sales to a 100,000 cases by dropping the bottle price and bringing in big valley juice (no one will know) and we’re rich!”

    The winery buyer’s dilemma is that if you don’t wait for Chapter 11, you are unlikely to get a great deal on a property as the owner will hold out hoping to be made whole. If you do wait until Chapter 11 or 7, you may get a better price, but are only getting physical assets and distressed inventory for your money. Now what?

    Winery and vineyard prices lag behind the wine market. Wait for a solid upturn, then buy.

  4. Whew, timely and ugly, both at the same time. By good fortune, we own our vineyard outright, but that still doesn’t help generate a market for a start up. We are content with 1Ton/acre yields, and just intend to stay small, 250-350 cases/yr, and quality has proven to be a good place to be coming from…in addition to cutting our prices by 30% , which leaves not much if any profit/ bottle. Our hope is to get by with meeting costs, continue selling 90% of our grapes, and hope that the market comes back sometime in the next few yrs.

    Unfortunately I know personally folks who are strung out, but also know others who are doing quite well with delightful high end wines, albeit at prices under where they had started. Maybe the misery of Napa’s truly high high end wineries will be the benefit of Paso. Who knows? One thing I know for sure, however, is that I am oh so glad not to have to be selling 40,000 cases (or substantially more in many cases) or even 4000 cases into this market.

    We were met with good cheer and plaudits at the Gold medal pouring last weekend for the winners of the San Diego Intl Wine competition. Virtually everyone we poured for were complimentary of our wines and were delighted to find fine wines at way below Napa prices. Interestingly, the bulk of the comments of the tasters and judges was overwhelmingly about quality, not price. Reducing our prices by 30%, however, did not hurt tasters’ feelings. Our goal is to acquire Cerro Prieto wine fans the old fashioned way…one client at a time.

    In Paso we have an advantage over Napa…in addition to being way less expensive than Napa, many of us spend inordinate amounts of time with our customers, and former Napa fans are now visiting us rather than going to Napa. A not infrequent comment is, “It is just so much more friendly down here”. What I believe they mean, however, is that we are smaller, and can spend more time with individual buyers. It is a personal touch, one I think “Napa”(generically speaking—of course, there are exceptions) lost a long time ago. I recall my last trip to Napa, and saying, “Never again”. Well, that goes doubly, now. It doesn’t make it any easier to sell wine here into this market, but we are definitely benefitting from Napa’s high prices and less time spent with customers. How do I know that? Simple. I hear it from former Napa devotees.

  5. oops, sorry about the website goof.

  6. Hey Larry,

    I’m sensing some Napa envy.

  7. I seriously doubt Larry has any region envy.

    But back to the point. There are crazy deals being made on the street by many of the large wholesalers for the widget brands. One free case on one sold type deals. Even though our business is not backed up with inventory and not dropping price (mostly because of responsible pricing to begin with), many of our buyers have clutter getting in the way and eating up budget to buy. The biggest result seems to be 2 and 3 case buys where we used to see 5 case buys.

    Foot traffic is down in the tasting room, but our conversion rate is strong and our wine club is growing.

    Our focus has been to spend more quality time with our customers and pay careful attention to costs in order to protect both our revenue and margins. So far, so good!

  8. Are you talking to me? (with regards to Napa envy)?

    No envy here – just happy to be where I’m at (-:

    Cheers!

  9. I’m with Morton. I don’t see too many wineries changing hands. Diageo has three wineries in Napa, Constellation has several, Foster’s has several. Granted you could point out a few holes in their portfolios, but how can a sales rep effectively market even more wines and carry even more samples in his trunk? The big guys are all full of brands, many of them struggling, and the other sets of buyers (other than Foley) just haven’t materialized.

    My opinion is that wine brands, like restaurants, are just too plentiful right now. Some of them are just going to go away. Sad, but I think that’s the reality.

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