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Pali-zation, or Signs of the times

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I’m being re-sent a lot of wines that were first sent to me 3, 6, 9 months ago. Over the years, this has happened occasionally, but not too often. Now, it’s routine. This tells me something significant: many wineries have been completely unable to deplete inventories of existing stock, even when they get good scores. That is unprecedented in my 20 years of reviewing wine. It’s one of those canary in the coal mine situations. The question is, Is there a time lag between now and recovery, or are things getting worse?

There was a report yesterday from Reuters about how a little Santa Barbara-based winery, Pali, has so much wine left over they can’t sell, they’re basically dumping their $40-$60 bottles of Pinot Noir for $19. I’ve given great scores to Pali, especially for their 2007 single-vineyard Pinots, which are great wines by any standard. But Pali is caught in the crunch of this severe recession: although their wines are terrific, they can’t sell them. Hence the price slash.

Anecdotally, the same thing is happening to other wineries. I think I earlier mentioned a Petite Sirah I gave a score in the low 90s. It retailed officially for $14, which means you can probably find it for even less than that. Turns out (according to the brand’s owner), he obtained the wine, in bulk, from a producer who simply couldn’t sell it for the asking price of (as I recall) $30 or $40. So the original producer preferred to dump it, rather than lower the price and “dilute” the image of his own brand.

This sort of thing has always happened in wine. It’s just happening a lot more these days. The chief beneficiary is, of course, the consumer. As tough as it is for the Palis of this world, it’s great for the average wine buyer, who’s getting some of the best values in decades. The conventional wisdom now is that the recession has consumers drinking as much as they ever did, but spending less on what they buy. That is likely to be one of the lasting impacts of the economic slowdown — a broad swathe of the consumer market has niched downward. Retailers are taking notice: giant Walgreens just announced they’re adding beer and wine to their stores. The company’s CEO explained the unusual move this way: “We’ve adjusted our retail model to respond to what we believe will be lasting changes in consumer behavior.” Lasting changes. That means Walgreens believes people are going to be in a lower-spending mode for at least as far as the eye can see. That translates into more bad news for wineries like Pali.

The Reuters article I referred to above also contained this quote from Robert Smiley, a wine business guru at U.C. Davis’s School of Management. “[S]ome of the cult wines will even make deals with you.” Deals with cults! Who knew? No one knows exactly what the financial status of the cults is, except their bankers, but I’ve been reached out to by elements in Napa Valley in a concerted way that has never happened before, which tells me that some of them, who used to feel invulnerable, now realize they’re as vulnerable as the next Pali.

There’s one more factor to consider in the future of very expensive wines, a factor that’s more psychological than objective, and that’s the attitude of Millennials, who obviously are the longterm future of the wine industry. From what I can tell from the blogosphere, they’re far less impressed by “cults” and “names” than their parents were. That could represent a real tipping point. If the famous cult wines end up like the Republican Party, largely the shrinking domain of older white men, they’ll find themselves an ever-smaller and less relevant minority. Pali-zation will reduce them to cannibalizing each other.

  1. An interesting observation. Is it a red flag? Maybe we should quantify it: % resampled? net increase in bottles remailed? This quarter, X% of samples received were new, Y% were second mailings, Z% are PR departments totally flipping out?

  2. Steve,
    Check out this link for a blog with comments from Tim Perr regarding the Reuters story. You might want to rephrase your use of the term “dumping”.

    http://www.wineberserkers.com/viewtopic.php?f=1&t=11054

    C

  3. vineyard1 says:

    Dear Steve,
    I applaud you for addressing this topic with such a diplomatic perspective. This is a very real problem in this upside down industry in which image and price have always been so closely connected. The challenges of today are unlike any before and forcing wineries of all sizes to adjust their business models. We appreciate the forgiveness from the critics.
    On a separate note, not all republicans are old white men. We drink wine and read your blogs. We’re straight, gay, black, white, male and female. Your outlooks and opinions are appreciated, although the political digs are a hugely unnecessary turn off.

  4. Steve…I realize that you are only quoting sources and then drawing (soundly) an analysis from the information…as I have been writing (for a while) what I find incredible is that all these sources quote industry people…since it is the private citizen that buys and consumes these wines we should be taking care looks at what they are doing…an announcement was made today that credit card defaults are at an all time high …unemployment is high and according to the experts will climb higher next year and if you check, the housing market will begin another tumble in the second half of 2010 with 2011 “looking very grim”.

    We will recover and be stronger (eventually) but people in the wine business need to understand that we are looking at at least two more tough times…I doubt that “dumping” wine is going to continue to work for that long!

  5. Morton Leslie says:

    I don’t see anything unusual in the bulk wine market. If anything the market for Napa Valley bulk Cab seems tight to me. Tough to find anything of decent quality for under $25 a gallon. That’s equal to about $4000 a ton. I have seen it much worse. I’d like to know “guru” Smiley’s definition of a cult wine and a deal. He should have been around in the 1980’s.

  6. Lenny Pepperidge says:

    This is a good thing. It’s further proof that this recession is truly accomplishing what the economists would call, “creative destruction” to a dysfunctional business model for a great deal of the wine industry.

    Perhaps wineries, wholesalers and retailers can now go back to actually doing the difficult long term legwork of building brands and sustainable marketing plans rather than just flashing a piece of paper with a Parker score on it and expecting that to do their work for them.

  7. Just to put another perspective on the looking glass. Looking at the statement “even when they get good scores.” The products do not sell out. Could this not be an expanding dilution of the effect scores have on wine sales? Be it that the quality of wines are getting better or scores are becoming inflated the market has a substantial quantity of so called 90+ wines. As some producers developed a flawed marketing concept based on selling wines exclusively by score, the production grows, the scores continue to arrive but the rush of wholesale and DTC orders does not and all the sudden the warehouse is full. Tie this with the reality of economic market conditions and you find yourself having to move product be it by fire sale or by repackaging some of your current product to a category more targeted to the current market as it sounds like they are doing here.

  8. Re Pali–

    When their 2007 Pinots were released, they almost immediately dropped the price on one of their vineyard-designates to $19. That wine, from Huntington Vineyard, was very good, and it was widely mentioned in a “name your inexpesnive wine choices” set of responses to a Dr. Vino challenge.

    The Reuters article is amazingly bad journalism. At least wine writers post opinions which are always subject to second-guessing. This was supposed to be fact.

    There are real challenges facing the wine biz, but reporting on them ought to be factual.

  9. Phil, you may be partly right that an inflation of 90+ scores from many more critics is diluting the ability of 90+ to move sales. If so, I think it’s to a very small degree. I really think it’s the economy that’s making it hard even for wonderful wines like Pali’s to move in this market.

  10. Morton: I think he was around in the 1980s.

  11. Morton Leslie says:

    I was referring to being here and experiencing the wine industry in California, not the fact he was alive in the ’80s and teaching econ at Cornell.

  12. cellarman81 says:

    Well, I have used a brand new tool that was created by an innovative company of the San Francisco Bay area named Vinfolio. Their product is called Marketplace and basically enables private owners as well as wineries and retailers to place their unsold wine for sale through this company, the same way wine auctions are made. You just have to create an account, put your wine for sale and other users will place bids that you can either accept or disregard. Here is the link that made me aware of it: http://www.prweb.com/releases/2009/06/prweb2558854.htm

    Wineries should check it out.

  13. Carlos Toledo says:

    If you think the carnage is bad enough in the USA just take an Euro Tour of the Disgrace. As an importer in poor Brazil i’m been hit a few times per week with offers that would make the winemaker Jesus spin in his grave. Spain, Portugal and Italy.

    For those who want to time travel this is a good place to be. Brazil’s barely, slowly stepping in the wine world…… it’s fun to watch how consumers behave here.

    Best wishes, c

  14. Carlos: Thanks. I’d love to hear more from you on Brazil.

  15. Well, given their online approach to selling wine (where they have the greatest margin), I can see why they might be in trouble. I can only shop their site if I *first* sign up for their mailing list. And then, once in possession of my User ID and Password, it tells me there is no wine for me to buy.

    If they really want to sell the wine, they need a better online solution. Compare with St. Supery’s offer of their 2003 Merlot for $150 a case, shipping included, which I guarantee is moving some wine for them.

    I would instantly buy a case of Pali based on your story above if I could do it online at $19 a bottle. But I can’t. Dumb.

  16. Mike: Thanks for making an important point. I don’t do anything online if 2 easy clicks don’t get me where I want to go.

  17. I just got a very nice email from Saxum Vinerards last week suggesting that since I did not buy the recent release I ought to take some action to reflect my continued interest in buying wine or I would be banned from the mailing list. Doesn’t sound like the recession nor a plethora of 90+ scores are enough to reward past loyalty yet.

  18. Adam, that’s pretty serious. I would like to see a copy of that mail.

  19. You are right steve, the Millen Gen is our collective future. You did forget to mention one other thing the younger Gen doesnt care one bit about. Numbers. They know they like what they like regardless of #’s. If I were you, I’d step year by year farther away from WE. The Q is, how do you make it as a wine writer without those corporate checks.

  20. Dennis Schaefer says:

    I tasted and reviewed the Pali wines in February. Contrary to the Reuters story, the Pali wines were never presented that way in my marketplace. Their $40 & $50 pinots are all single vineyard designates, like Durell, Inman Olivet, Cargasacchi Jalama, Fiddlestix, etc. That fruit doesn’t come cheap; they are not “dumping” those wines. Pali intentionally made 2 other pinots that were meant to come in at a lower price point. The Huntington ($19) is a blend of several cool climate Santa Barbara County vineyards. The Bluffs ($19) is likewise a blend of several cool climate Russian River Valley vineyards. They are delicious wines and, frankly, best buys when it comes to pinots. The Reuters report did not really elaborate or put this into proper context. It was just plain lousy reporting. So they do not have “so much wine left over they can’t sell.” Quite the contrary, they saw the need for reasonably priced pinots and they filled that niche with blended but AVA specific wines.

  21. As I said, it was a very nice email with the chance to reverse course. The only other two times this happened to me, Lenonetti did not give an opportunity to resurrect status after actively buying for 7-8 years and Williams Selyem gave one more release opportunity. I am just surprised that at this stage of a troubled market, that the same rules apply. Here is a copy of the email.

    Dear Saxum Mailing List Member,

    We want to take this time to thank you for your original interest in purchasing our wines. However, we have noticed that you may not have purchased during one or more of our offerings this year. We realize the problem could be that the wines sold out before you had a chance to place an order, or that our offer email was blocked by a spam filter. If you would like to purchase wine during future releases, please send an email to info@saxumvineyards.com and request to remain an active member of our mailing list. If you have already contacted us after receiving the postcard, please disregard this email.

    Best Wishes,
    Justin & Heather Smith
    Saxum Vineyards

  22. This all seems like a healthy correction in supply and pricing in a challenging market. A lot of high end wine and grapes will be sucked into some cheaper wines until the market rebounds.

    By the way I was at the Miami Wine Fair last weekend and 80% of the retailers and restaurants I talked to said things were rebounding and expected a better holiday season than last year. And yes in higher end wines as well. Not as good as when people were borrowing money they couldn’t pay back went out and bought things they couldn’t afford, but still better.

    Constellation just reported better than expected numbers yesterday. I guess their transistion to a more premium strategy is working. Somehow I think the sun will rise tomorrow.

  23. Carlos Toledo says:

    Steve,
    19 years ago the importing of all goods (food, spirits, cars, clothing, etc etc) was authorized by the newly-elected president. The first things we bought in waves were colt 45, Milwaukee’s best, bud, corona and the german blue bottled wines. Drinking an american beer had such cool taste. We belonged, finally, to the world.

    After 94 Brazil began a process of economic stabilization that made the currency here very expensive, hence we’re able to buy a lot of stuff from Chile and Argentina. At the same time there was a huge revitalization in the wine industry in both countries. I’ll keep the great world wines aside, but since then Brazilians have barely begun to learn how to drink wine.

    Let’s keep the elite aside from this topic. Brazilians love sweet wine. The cheapest italian lambrusco, the wines made with no vitis vinifera from here, and very very cheap Chile and Argentina’s.
    Primarily red wine is drunk. For a country that’s most of the year hot, roses, whites and sparkling consumption are close to Zero.

    It’s part of my daily routine to teach everyone how much nicer taste the (barely) premium beers and the better wines.

    The current crisis left bruised the importers (they’re short on the US dollar in august. ouch), not the consumers.

    As Brazil becomes more civilized it’s interesting to notice how many more people also enter into the wine world. In many cases there’s resistance to its drinking (snob, high brow, etc). At the same time the country is becoming, at last, some[what] important player in the world’s economy. Wine drinking is part of this transformation. We want to be like the rich ones……i feel this change is to a great degree subconscious.

    The wines stores in nothing resemble their american counterparts. In america (where else, damn??) the stores layouts invite us for shopping. We are sucked into buying. Over here the true professionals in this industry are scarce and their moral values are very iffy in some cases.

    Few can wear a ”i’m impartial” tag. Certain international magazines are revered as ”the ultimate guide” for buying expensive wine. People are very oblivious to lots of what’s going on in the wine industry as a whole. Very few buy the vintage aware of the crop year. Was it good or bad? Who cares.

    Reading many international publication demands hard extra work and certain skills.

    All in all it’d be so nice for you all to time travel. Too bad we all don’t have lots of time to spare and learn/see what happens in so many parts of the world.

    Finally the US wine here: It’s nothing and it deserves its place. In January 2009 i was in the States seeking wines to sell here and i was showed the door MANY times. One or two stubborn heroes import california wines. They usually phase it out before too long. California doesn’t promote wine fairs like everyone else, california winery must be SO WELL-OFF.

    Sorry for the lenght of this post. Hope it helps someone. Your blog is hella nice.

    c

  24. So what if we are all discounting our wines…..at least we aren’t wine bloggers…giving it all away for free! :)

    Kidding, I’m just kidding.

    Adam Lee
    Siduri Wines

  25. Adam: ouch.

  26. Scores don’t equal sales. I love it.

  27. Steve, this is somewhat misleading. We are not dumping wine at all. Our current $19 Pinots, the 08 Huntington (Santa Barbara County Blend), 08 Bluffs (Russian River Valley Blend), 08 Riviera (Sonoma Coast Blend) and 08 Alphabets (Willamette Valley Blend) were all intended to be released at $19. The price is actually profitable for us becuase we were able to keep our costs down on the fruit, production, etc. Opportunities are only getting better (at least in the near term) going forward. We told that to Reuter’s but they didn’t print it that way. Needless to say, our sales of the $19 Pinots have been through the roof – we have sold more wine in the last two months than we had in the prior two years.

    For the record, we still make a line of $50ish priced vineyard designates which are our best wines (and the ones you have given the highest scores to).

    I do agree that this is a great time to be a consumer of fine wines. The deals will continue to come.

    Tim Perr/Pali Wine Co.

  28. Point of clarification:

    Pali is NOT “dumping” any wines. The single vineyard pinots are all still priced in the $40-$50 price range.

    In addition to our single vineyard pinots, we have introduced our Cuvee line of pinot noirs which are AVA specific and intentionally priced at $19/bottle retail in response to current market demands. We are taking advantage of the soft market for grapes and putting out great wines at a price that consumers are demanding given the economic situation of the last year and a half.

    The Reuters article, as well as Steve’s above, seem to be confused with the Pali brand and our new products. We are hoping to become the leader in the $20 and under category for pinots. The wines are still being made from top vineyards and processed and treated by hand. Our total production across all bottlings is and has always been 7,000 cases/year or less.

    Aaron Walker
    Pali Wine Company

  29. Tim and Aaron–

    Please help me with this. Originally, I had Huntington 2007 at $40. A later notification said its price had become $19. It was one of our (CGCW) buys of the year in terms of what we had to say about it, and it certainly was a fine wine.

    So, the question obtains. Did its price drop after initial release or was it always meant to be $19 and there was some early confusion about price?

    I look forward to the 2008 and hope it offers the same kind of buying opportunity that 2007 Huntington turned out to be.

  30. Steve, what do you mean by “dumping wines.” Are they physically thrown away, or are they at least given to charity auctions, or non-profits to raise money?

  31. I mean declassifying or selling in bulk or some other form of selling it for less than what you hope to get for full wholesale or retail.

  32. Pali wines are quality and affordable.
    I’ve followed Pali for years and appreciate their effort in keeping a high standard, yet offering competitive pricing.
    Great business — Kudos to Pali.
    I’m in the industry and understand how “names” use scores and marketing to sell. In the end, how you treat the juice is what matters.
    Frankly, not everyone’s juice “matters”.
    People will spend a few more dollars for a quality produced bottle.
    What Pali has going is a passion to make the best product — Whether you follow scores or not, X, Y and/or Z’s will appreciate.
    Dumped? If Pali produces from “dumped” grapes, what are the others doing that’s so special? (Maybe they shouldn’t have dumped.)
    I would choose Pali over most, simply because of quality.
    Price point may be the same or slightly higher, yet perception is not overly mainstream…Everyone’s so tired of that mentality.
    Heart and focus on quality goes a long way.
    Be careful not to be so beholden to marketing and scores.
    Appreciate cache.
    Understand what’s going on in the market.
    Do your best to provide quality products at a reasonable price — That’s what I believe is Pali.

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