Where are price points going?
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.