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The death of high-end wine?

22 comments

Ever since last Fall, every wine writer has written about how hard high-end wines have been hit by the recession. I have, for sure. The latest is the Santa Rosa Press-Democrat’s Kevin McCallum, who wrote this piece entitled “Makers of high-end wines caught in ‘dead zone’.” It does a good, and scary, job of describing “the demise” of Flanagan Family Winery, whose owner sank his heart into the project, only to see the recession come along and kill the ultrapremium tier he hoped to conquer.

Kevin gets to the point when he writes “Some think the reversal will be short-lived; others say something has fundamentally changed in the wine business.” This is, of course, the 64 dollar question, and I won’t attempt to answer it because I don’t have a crystal ball. But it is worth speculating about the second premise of Kevin’s statement, namely that “something has fundamentally changed in the wine business.”

Has it? Or are we all just prone to making cataclysmic prognostications of gloom and doom, when, actually, things don’t ever change that suddenly or radically? Well, to begin with, some things do change that suddenly. Sept. 11 changed almost everything in America. I think historians will refer to pre- and post-Sept. 11 for a long time (and possibly to pre- and post-fourth quarter of 2008 as another epoch-shattering event). And it is, of course, to the fourth quarter of 2008 and the massive recession that the question has to be addressed concerning the wine industry: Has the deck been fundamentally reshuffled, or just temporarily? How long will expensive wine suffer?

One obvious place to look for the answer is personal income. Americans have lost literally trillions of dollars over the past year or so. That’s spending money, folks. And that loss means that tons and tons of stuff is not going to be bought by consumers, including wine. We know this, so the followup question is, will Americans recover the money they lost? If they do, then sales of expensive wine will recover. If they don’t, then it won’t. It’s that simple.

Even if you assume that the recovery is upon us, and employment goes back up, and salaries stabilize if not actually rise, there’s still a big problem: peoples’ retirement incomes — their 401Ks and IRAs — have been demolished. Let’s say someone was making $75,000 a year before the recession and had $750,000 in a retirement account. That person didn’t mind spending $15 or $20 for a bottle of wine, because while she didn’t exactly feel rich, the retirement account was reassuring.

But assume now that the value of her IRA has fallen to $350,000. Assume she still has her $75,000 a year job and is reasonably secure in keeping it. Will she still spring for a $20 bottle? I don’t think so. If she’s like many folks I know, her reasoning is, “Gosh, I’ve really lost a lot of money. I have to rebuild my nest egg. And my employer has been talking about us contributing more toward healthcare premiums, as well as higher co-pays and prescription drug costs. So, while I’m not ready to give up wine, instead of spending $20, I’m going to start looking in the under-$10 category.” She does, and you know what? She finds that there are lots inexpensive wines that are as good and satisfying as what she used to buy. She becomes a permanent under-$10 buyer. (Along these lines, I recently gave a high score to an $11 wine. The winemaker called to tell me that it was really a $40 bottle from a winery that couldn’t sell it at that price, so he bought it, retailed it for $11, and still made a tidy profit. There are innumerable instances of this happening every day.)

Multiply our hypothetical consumer by millions of people and you have a permanent shift in American wine-buying habits. The only thing that could change this would be psychology: people are conditioned to think that if something costs more, it’s better, and nowhere is this more true than with wine. It’s a fundamental part of human nature to associate price with quality, however mistaken this is. Here’s where the Millennials and Gen Y come in. In ten years, when they’re at the peak of their purchasing power, will they revert to the old “if it costs more, it’s better” way of thinking, or will they — the smartest generation of wine consumers in history — recognize that cost and quality aren’t always related? Again, I don’t know, but I suspect  they may be bamboozle-proof. If so, then we really, truly are witnessing the death of high-end wine.

  1. When I was in Burgundy this Summer they said that a lot of wineries there are focusing on China now that the US high-end wine market isn’t so hot.

    Do the Chinese have IRAs?

  2. Doctor, I don’t know, but I think they have a social safety net under their Communist system. I’ve read that the safety net is under enormous pressure, though, and the govt. is trying to figure out a way to save it.

  3. Steve,

    Interesting piece. My wife and I have also lost a significant portion of our retirement but seem to have taken a different direction than most regarding our wine purchases.

    While we too have increased our 401K contibutions, we’ve not stopped purchasing our favorite higher end wines and continue to seek out new taste experiences. We have however, significantly curtailed our purchases of lower end “every day” wines.

    The end result, for good or for bad, is that we’re drinking substantially less wine. Though the wine we do drink is of much greater quality. I like to think that, in our own small way, we’re rewarding those that put in the work to produce better wine.

    While the low end wineries have their place in the market, I think we’re much better served in the long run to help those vintner’s that traditionally and consistently strive to put out a superior product.

    The large bulk wine type companies always seem to survive. But in times like these, the smaller traditional vintner, can’t live without us.

  4. Steven Mirassou says:

    Steve:

    The year after 9/11 felt a lot like today (at least on the wholesale level). I remember the discounting that was done and all the questions about whether prices would ever get back to where they were, etc.

    Part of the fun of the wine BUSINESS is finding new markets; new ways of presenting wines, new ways of telling your story, new ways of defining what is “high-end” and from where “high-end” wines can come.

    Of course, no one can say what permanent changes (if any) the current economic crisis has wrought, but it is times like these, I think, that provide the greatest opportunity to make the greatest amount of change.

  5. So what is this $40 wine selling for $11?

  6. Christopher O'Gorman says:

    Steve,
    We aren’t having any trouble selling our top end wine at $135/bottle. In fact, in one day last week a sales person sold 12 cases.

    The bigger problem is with the wines in the $40-100 range, from which many are trading down to $20 and under. It is absolutely critical, however, that wines at the high price points deliver with a top quality drinking experience.

  7. Steve:

    I would ask you to consider a couple points. First, Americans “lost” trillions in the market decline. Since the low point on March 9, 2009, the market has made a significant recovery. Without great detail, I know my own personal equity portfolio has recovered to the point where I am net down 10% or less. So whatever each person’s own situation, suffice it to say that 401(k)’s and IRA’s have recouped a lot of the initial loss.

    You also mention Psychology but miss the point a bit. It is the general Psychology of the consumer that is needed to re-start spending. That will have to begin with a general mental recognition of my above point. Once people can get there, and once other general economic conditions are better, and people are aware that they are better, everything has a shot at a comeback; including wine.

    Now will the $125/bottle wine see re-birth; i think we might agree on a gloomy view for them. I hope the youth you look to for our future though will recognize that, at least in some cases, higher price can mean higher quality. That pendulum can swing both ways.

  8. Chris, I hear so many conflicting things. I’d love to be able to examine the books of any winery I chose. In fact, if Obamacare passes, maybe I’ll be able to!

  9. Brad Alderson says:

    The cycle will repeat itself. People will always aspire to the perceived “best”. However based on experience from previous cycles, having paid less for very nice wines many but not all consumers will be a bit more critical of paying high prices for wines without a track record. For the near term they will have lots of choices at reasonable prices and that will make the mid market grow.

  10. Morton Leslie says:

    The death of high end wine?

    Here is the YTD from one high end winery whose wines range between $40 and $125. The wine is not a true cult winery, they always have had to work to sell their wines. Wholesale is down 30%. Second label is up %30. Direct to consumer, including wine club, visitors, and other retail up %6. Total revenue down less than 2%. Biggest hit has been wholesale purchases in the middle ground, not at the top end.

    If you do not have a direct to consumer component, particularly a stateside retail room like every imported wine, you are probably down 30%. I think Champagne numbers bear this out.

    One winery is a small sample, but I see everyone working harder today to sell their product. Hard work never hurt anyone.

  11. Lenny Pepperidge says:

    I think you err in too closely linking a possible rebound in the luxury wine market directly to any economic recovery/stock market boom.

    What’s happened over the last couple of years has fundamentally changed the American consumers’ psychology–in ways probably not seen since the Depression generation. The consumption patterns that are taking hold now will be permanent. American consumers will not suddenly revert to binge consumption and zero percent savings rates upon recovery. Met Life economists and psychologists have written an excellent in-depth study of the fundamental changes in American consumer behavior that are taking place at the moment.

    Also keep in mind that an estimated half the homes in America are under water right now. Even after any economic recovery is well under way, millions of American consumers will still be years from recovering any substantial equity in their homes.

    It’s being said that yesterday’s $60/bottle consumer is today’s $15/bottle cosumer. With economic recovery, he might become tomorrow’s $25/bottle consumer, but it’s highly doubtful that he’ll ever hit the $50/bottle mark again.

  12. Once again, Steve, you force me to talk economics, a subject I studied in exhaustive detail and worked at for years until I was lucky enough to become a winewriter. I wish you would stop. I wish I could stop.

    A few basic facts.

    –Every economic downturn in this country has been followed by an economic recovery.

    –When a winery fails in the midst of an economic downtown, it is not unexpected. Wineries fail at far lower rates than other small business, however.

    –Starting an expensive new business and having no capital in reserve in case something goes wrong is not unique to the wine business.

    –The laws of supply and demand that sent oil prices soaring to $150 a barrel and dropped them to $50 a year later also apply to the wine business. But, as Chris O’Gorman has pointed out, not every wine has been affected, and for every failed Flanagan there are ten successful Merryvales.

    –The problem with anecdotal information is that it lacks scientific substantiation. We all know that many wineries are hurting to some extent, but differing circumstances dictate how each is hurting, how well each will survive and which ones will actually grow during the downturn.

    –We have seen this story before and we will see it again. And the story has never been “the death of good wine sold at very profitable prices”, obviously aside for Prohibition followed by the Great Depression.

    Indeed, it can be argued in an economic Darwinian sense that this kind of shake out of the weak performers, as sad as it is for those who are suffering or failing, is nothing more than the way our system operates. No one wants to see anyone’s hopes dashed or money lost. but capitalism does that. Ask GM, AIG. Lehman Brothers.

  13. Steve … thanks again for another thought provoking blog…. I read the same article and wrote a blog as well yesterday (http://www.viralvines.com/2009/09/09/the-dead-zone-whats-your-perspective-on-wine/). To me there are winners and losers. High demand and low supply has always been a mantra for “expensive” in any industry and there will always be those that can afford what they want at any price.

    On the other end of the spectrum are wines that are high volume and low cost (but rather uninspiring), and these too particularly in today’s economic crunch, will do just fine.

    What I worry about are those really fine wine, dedicated producers that do not have sufficient name recognition to weather the storm. And yes, consumers will hopefully figure out that price alone has just about nothing to do with quality (even though COGS for some wines necessitate higher price).

    As Charlie suggests above, weak performers will always suffer or fail during difficult times. My concern however is for those that are not weak per se – they make great wine at very reasonable prices – but simply are getting caught up in a weak economy and distribution constraints (Prohibition era “Blue Laws” and increased taxation) that would cripple almost any one.

  14. Charlie,

    As someone who too has studied economics for many years, I agree with most of what you said, but the points on supply and demand for wine are a little different. The information is imperfect unlike the oil market where demand and supply are easier to ascertain. Also wineries don’t control the price of wine once it is sold to a distributor or restaurant and wine isn;t a raw material which is made into higher value products..

    I tend to believe the “end of high end wines” is overblown and 18 months from now thing will be very very different.

    Also, you are assuming wine is a normal good, what if it isn’t?

    Sooth

  15. Sooth–

    My first reaction is “aargh”. What have I gotten myself into? There is information out there, both anecdotal and collected, about shipments, post offs, etc. I have none of it. So, I have tried as best I could to stick to general truths.

    You know, things like “what goes down must come up” and “there’s a sucker born every minute”.

    Or to quote my mentor, the man who changed me from an academic to a practicing, useful analyst of local economies, “you cannot swim upstream against the market”.

    Now, all of that adds up to the same thing to me. Wine will eventually follow its nose (pun intended) back up the snob scale. If this recession is longer and deeper than most post-war recessions, the return to overexcitement at the expensive end of the market will be longer in returning.

    And, now, I leave the arena and go open a $50 bubbly.

  16. Thank God for Charlie O’s ebb and flow salvation. The guy next to my shop sells antiques and asked me yesterday of the year’s business. After my positive response, he let go on his end – “Well wine can play either role. Folks can blow it out as a high-end impressive gift or they can use it as refuge when avoiding the high-end in staying at home for dinner and having a decent bottle of wine. The rich housewives that were coming to me are just not spending that money on this anymore.” The treatment of wine as overspending has not impacted my market but I know it has others. Some of these guys did need a heavy dose of reality. Bordeaux was out of control. Champagne was out of control. They may prop themselves up with China for a while but it won’t last long. The money will be back but will be smarter. I think construction is the first thing to stop in a crash and the last thing to start back up. When local construction picks back up, health will return. I am seeing really desperate distributors out there – no inventory. They want all of us to buy pre-sell and take all. When the distributor becomes only an order-taker and has no inventory, then there’s not much use in having them around. This may be the death blow to the three tier system. Bring it on.

  17. It’s all over and will not come back except for the very high end like gran cru burgundy, etc. The super rich are still buying these wines. Was talking with a friend in the importing business about this. He said they sell all their gran cru and can’t give away their premier cru. A restaurant owner on Hilton Head told me that a very rich customer came in and bought 8 bottles of Insignia…The rich will continue to buy…all others are trading down.

  18. I wouldn’t call it the death of high end wine, but I would certainly call it the potential death of high priced wine. Even then, I feel as though there are those whose nest eggs remain, or, at the very least, remain with few scratches to them. With many high end wine producers usually creating very low yield, you have to imagine it would still appeal to this niche group. However, I can agree that there is still a fundamental shift in consumer psychology on the horizon, one that speaks to the vast majority.

  19. Morton’s comment mirrors what has happened at Steven Kent this past 12 months.

    The concept of “high-end” is pretty nebulous. Where the challenge comes for consumers, I think, is in determining at what price point, the $ exceeds the value.

    The challenge for the wineries is the same as always: producing really good wine and then telling an authentic story about it so the potential consumer can make that $/value decision.

  20. Benson: this $40 wine for $11 sounds a lot like a Cameron Hughes offering. I know a few Cameron Hughes wines were just reviewed in Wine Enthusiast. I guess I’m plugging Mr. Hughes a bit, but if you have a Costco nearby, his wines are typically mid to high end wines purchased “under the radar” in bulk and bottled under his own label. Most are solid if not very good offerings around $10 or $15. I don’t know that any really drink like a wine I’d be willing to pay $40 for (probably a reflection that the wine sold in its ‘native’ bottle is overpriced), but they do punch above their weight usually.

    This is one of the clever tricks that Napa uses to keep its prices super-high. Wineries sell off excess wine to keep the supply of their ultra-premium wines low. Negociants buy up the “leftovers” on the cheap, which helps wineries with cash flow while they work on moving similar juice at $40 or $60 per bottle.

    Basically, a lot of high end wineries think we’re dumb or are so insecure we need to pay exorbitant prices to convince ourselves we’re drinking good stuff. There are others out there like C&T Cellars, but Hughes seems to be a big and very reliable player in the negociant game.

  21. It wasn’t Cameron Hughes.

  22. I hardly think we’ve seen the end of high end wines. As many responses point out, it is purely an economic symptom. High end wine does not equal buggy whips! Hand turned wine presses and horse drawn plows might have seen their death, but high priced wines are just experiencing a shakeout.

    High end wines are similar in nature to other desire driven discretions such as art, cars, restaurants, clothing, etc… there will always be someone that wants the best (or what others say is the best) and is willing to pay for it. There will also always be conspicious consumers looking ofr the prestige of their high-end purchase.

    What I see is the drastic reduction of positioning a brand as a high-end wine! The $3 glass, $1 label, $2 cork, $4 box, etc… that still contains $2-3 juice will not be trying for the $40 – $60 market anymore unless they have some serious magic in the bottle or 94 pt+ scores up their sleeve.

    I think this is a good thing – I know I enjoy an excellent bottle of $20 wine 100% more than an excellent bottle of $40 wine!

    Cheers from the Barn

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