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Who’s making money? Who isn’t?

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As a reporter, I’m constantly barraged by press releases and other forms of information. Sometimes it’s contradictory. And then you always have to wonder who the source is and if it’s trustworthy. The big question of the past year in the wine industry has been, of course, who’s financially up, who’s down and where it’s going. As I’ve long said, none of us knows with certainty what’s going on at any individual winery unless we’re the CFO and can see the books! Which we obviously can’t. Thus, what we know is largely anecdotal. Here’s the conventional wisdom:

- Anything over a certain price ($12-$15, in most scenarios) is dead. This has just been confirmed by Jon Fredrikson, at Gomberg Fredrikson, who reports that “California wine shipments dropped in 2009 for the first time in 16 years,” especially for “wines above $15 a bottle.” I have used Gomberg Fredrikson as a trusted source for many years.

- Nothing appears to be bulletproof, including (or maybe especially) the cults. Everybody’s reducing prices, but you can only go so low.

- People haven’t stopped drinking. Far from it. They’re just drinking cheaper.

Everywhere I turn, I hear “We’re scaling back…the bottom’s falling out,” even at wineries owned by very rich people. At Wine Enthusiast’s Wine Star Awards dinner last Monday, I talked to lots of senior execs (in some cases very senior) at wine companies and distributor companies, and everybody said the same thing: dead or near dead in the super-ultrapremium category. Which leads to the biggest question of all: If this is true, how come we’re not seeing a wave of bankruptcies or sales? Which we haven’t. Winery failures over the last 12-15 months in California don’t seem any more frequent than usual. I asked people this question, and the typical answer was, “They’re riding it out.”

Yes. That’s what companies usually do during downturns. They lay off staff, cut costs, and hope that down turns up after a while. But what we have in America is unprecedented. While there’s lots of hoping and praying things turn up, there’s no guarantee they will. What if things don’t? After a while, even the most stalwart owner will have to give up. Maybe some of the billionaires out there can afford to ride the tiger for years. But most families who own wineries are not super-wealthy. What do they do if, in another six months or a year, things don’t turn around?

I would think that by this summer we’ll have much more clarity about the ground situation in California. Since there doesn’t seem to be any improvement in the country’s economic situation, with experts predicting continued 10% unemployment (much higher if you count under-employment) and a federal deficit that the Congress seems unable to fix, it’s hard for me to imagine the average wine consumer thinking, “Okay, I’m feeling better, I’ll start spending $40 again for a nice bottle.”

The wine industry understands it’s coming through the worst market in its life. They’re hoping that 2010 will be better. But they know that events ultimately are far beyond their control.

Speaking of profits, I’m moderating a panel at the Wine Writer’s Symposium called “Wine Writers, Ethics & Income Streams.” They told me the subtext is “How to make money through social media.” As someone who’s earned (at last count) $1,495,989.59 through this blog (O.K., I’m exaggerating, the actual figure is $0), I thought that’s pretty ironic. I do have some thoughts on monetizing this stuff, but I’m not going to steal my thunder. It’s nice to have developed a secondary reputation as an “expert” in blogging. Just shows how bizarre life is.

  1. Steve, I’ve been very interested to see the same here in Washington state. Very tough economic times certainly but very, very few closures of wineries. This is particularly surprising given that so many of the wineries are small (less than 3,000 cases) operations started within the last five or so years. I expected a lot of folks who had jumped in whole hog to be going under in 2009, but it just hasn’t happened. Yet.

    The number of wineries in Washington which had been increasing at a steady clip slowed down in the second half of last year. There are lots of stories of wineries who didn’t crush grapes this last harvest because they were already sitting on so much wine. While I believe that the wineries are “riding it out” I’m surprised that they had the cash on hand to do it. We’ll see what the next six months holds but if things don’t improve I have to think that many wineries can’t hold out much longer.

    Another interesting datapoint is, while I have certainly seen discounting on the shelves – even for highly sought after wines – I haven’t seen anywhere near the dumping of inventory I would have expected. It’s like a game of chicken between winery and consumer. Unless something miraculous happens, I have to think the wineries blink first.

  2. Steve, I’ve been reading this via my satellite-linked, diamond-studded 32″ Apple MacBook Pro while being eating roasted Sasquatch steak and being massaged with rare oils by my harem on my 43′ yacht en route to my private island (all purchased with the windfall of funds that have come to me via wine blogging), and I must say that’s really helped me to pass the time.

    Cheers!

  3. Steve,

    I believe that the real answer is two fold.

    1. Every story is overblown now in the media. If you are going to have snow this weekend the weather reporter makes it into the “Storm of the century”. Stock market down this week? -the end of the world is coming. New IPad- a ground breaking invention that will change how we live. None of it is true, but to cut through the media clutter you have to have a hook and in the wine industry it is no different. Premium wines are dead? No they aren’t. In fact you will find billions of dollars of wines priced $50 or more will change hands this year in tasting rooms, restaurants, and shops. I don’t think anyone would even dispute this. Is it worse than 5 years ago? Yes, but being down 10% or so isn’t being dead.

    2. Those that are doing well don’t talk about it. Many wineries are selling out of their wines at profitable prices. It may take a little longer and they may drop the price a few bucks a case, but they are selling. They don’t talk about it because the don’t want to throw it in the face of some that aren’t doing well, or they don’t want to jinx it. The same is true with all consumers. Have you been in a Mercedes showroom lately? They are selling cars.

    We always strive for balance in winemaking, why can’t we get some balance on reality?

  4. David, you may well be right. The media does exaggerate. I try not to, but I’m only as good as my sources. Still, this current economic situation feels more severe than anything in the past. I guess we’ll just have to wait and see how things turn out.

  5. Thanks for sharing on the blog. Keep it up!

  6. Steve,
    I remember my parents speaking of the “Great Depression” and what their parents had to do to get through. Though it’s not that bad today, bartering may still be in our future. Just picture it; dinner for 4 at the swankiest joint in NY for 1 case of the most expensive cult Cabernet.

  7. It is my belief that those wineries which didn’t allow their prices to skyrocket due to outside (and often silly non-core) factors will have enough smarts to weather the storm. Those who don’t have far to fall to the purported new consumer-friendly $15 price point will be ok. However, those who allowed their owner’s ego or winemaker’s rep get in the way of rational pricing are going to continue to get wholloped. If a inery was priced in say the under $36 range, they can discount to members and get their bottles in the $15-18 range fairly easy. Then they look good in the eyes of members, thus retaining membership.

    If on the other hand, a portfolio is comprised of (Napa) $40-85 wines, they have to be super creative on how to get these wines into an acceptable level. If they manage to discount the 60-70%, people who’ve paid the big bucks for the same wine will resent the winery and figure they were not worth it 4 years ago. Working in the trenched daily (tasting room), I can personally attest, most people will not be stepping up to the $40 bottle anytime soon.

    The good thing is that, generally speaking, most family-run operations aren’t so full of themselves to price their sauce in atmospheric price strata, rather it was the corporate, rich guys- to whom there’s no love lost. Is it possible that they get what they deserve?

    Wineries need to be able to make a profit at $15-20 gross per bottle. It’s possible… even for the smallest of wineries with no economy of scale or puffs, stars, medals or scores adorning their walls;)

  8. Steve,

    Our company was up 50% in revenue last year and 40% up in actual cases sold. So I agree that not everyone is in the same boat here.

    Nicolas

  9. Wandering the hall at ZAP’s Good Eats tasting last night, I talked to quite a few folks who have Zins I like, which often means more expensive than $12 to $15. Found more than few wineries rushing new vintages to market.

    My anecdotal take on this is: wineries may be having a hard time selling out their inventories in 12 months, but it was not so long ago that they were selling out in 10 months or less. In a commodity business like ours, some years are going to be see wines clear out early leading to early release of the next vintage. My cellar is brimming already with 2008s, so those folks are not hurting. But, I can also say that I have fewer Syrahs and Merlots to review, which at least suggests a longer cycle than 12 months there.

    The biz cycle that hits all types of enterprises also always hits the wine biz. As a guess, I think we will see a few folks with very pricey wine hit the wall financially, but I also think we will continue to see more winery formations than we see failures. Cycles are part of the our industry, and many, many wineries got rich in the up part of the cycle. And did you see the economic news that the economy grew at the fastest rate since 2003?

    Wine sales at the upper end may be like employment. Sales will come back late, but the question, “Who is making money, Who Isnt?”, could just as easily have read, “Who made so much much money in the go-go days that it does not matter if we have a little slowdown?”

  10. Hey Steve, great post. Usually, in a slow down like this the casualties come later, after people have tried everything run out of money. The wine industry it seems has been dead for about a year and a half right? Other industries have been feeling pain for more like 3 years. In my opinion, it will be the wineries with a lot of debt that will face the biggest problems.
    One thing I wonder about is the consumer. A guy who used to drink a $40 bottle of wine who now drinks a $10 or $15 bottle may never go back to the $40 bottle because of the increase quality of the $10 bottle.

  11. The other party that actually knows (almost always) is their banker. Keeping a close eye to comments from bankers on this is very revealing. I did not sense a lot of panic from the bankers who presented at Unified this last week, they seemed more concerned with big picture of economy that none of us can control

  12. What up with that headline? Fell for it, clicked through. Are catchy headlines media exaggeration?
    ab

  13. David Graves says:

    I want to have some of what the other David is drinking–powerful stuff. There are real data about contraction of comsumer spending–unprecedented–and you can look it up. It’s not “the media making stuff up”.

  14. As a wholesale distributor of mostly premium and ultra premium wines in the State of Florida, from Palm Beach to Miami Beach and the entire NW panhandle. I can attest to the fact that premium wines sales are essentially DEAD. Most of our Portfolio is in the $75 to $300/bottle range (and higher), and a few wines under $50. I sold 6 bottles of a $14 Sauvignon Blanc this week. For the Entire State. Total. Anyone care for some of the finest CA Cabs and Pinots made? I’ll sell all of it for cost at this point…

  15. Stephen Hare says:

    Steve,

    Truth is always relative to one’s own reality. With over 6,000 wineries in the USA, we have the full spectrum of the bell-shaped curve to talk about. What point on the curve do we talk about? Each point represents a separate reality. I’ve found that many things wineries tell folks are PR tidbits designed to elevate the image of their own brand. However, when one walks through the isles of stores, visits the tasting rooms or checks the websites, one can really see which wineries are doing well and which ones are in trouble. Hopefully most wineries will be able to withstand this downturn but I think many wine consumers will never go back to $40+ as there are too many tasty wines well below that pricepoint. For smaller wineries that have higher costs-of-goods, it will be very difficult for them to remain profitable.

    I recall having a discussion with a group of wine consumers recently. The talk drifted to their preference of smaller, family owned wineries and how they made better wine than the large conglomerates. Small lots, hand picked, hand sorted, new oak…they loved the story! Then I asked how much they spent on a bottle of wine…the answer was “no more than $15.00.” So, in the end, the consumers were not willing to support the wineries they wanted to support.

  16. Steve,

    I think you have reported on what you have found and heard, so I am certainly not accusing you of the “if it bleeds it leads” approach. In fact your reflecting on the lack of banruptcies is the first I have heard anyone start to talk about this somewhat contrary piece of data(contrary to at least the mood of the reporting).

    Thanks for your insights.

  17. Brett, you make a great point. I would add that there are some terrific $25 bottles out there that rival wines 3-4 times the cost.

  18. can’t remember which one of the Silicon Bank Wine Division fellas said in effect, people will always strive to drink better wine, to trade up.

    so let’s get real. as long as there is a pecking order out there in the world – AND THERE IS – there will be a time and place for every wine, even the most expensive. there will. it’s a shame people have to lower prices, because that cheapens a product, and more importantly, the brand behind it; it points to wine being nothing more than a commodity, like wheat or corn, product differentiation lost in the sea of sameness.

    in my bright-eyed opinion, it’s all about perception and how it gets maintained. and having not only a singular product, but a real, not contrived, emotional connection with your consumers that no-one else has. right? that’s why people are still buying mercedes. so maybe these wines getting shook (shook? that doesn’t sound right – whatevah) out didn’t have that, and so they must go. with so many similar products out there and too many people trying to be everything to everyone, something has to give somewhere.

    it’s like the guvenator says, “[big spenders] will be baackk.”

  19. For those with access just spend a little time looking at D&B’s for many wineries, Importers and distributors. Some great wineries with solid history may not say they are in trouble but those invoices pulling to 30-60-90-120 tell another story.

    Many are making strategic decisions to stay afloat others are just hemorrhaging cash. None the less we will still see some fold, liquidate or sell over the next year.

    For some it’s like Vegas. When you’re down they keep playing trying to turn it around. You may play longer but more often than not the house still wins.

  20. like the 2006 Cambria Julia’s Vineyard for instance, which is why they are saying that the $75+ range is dead.

  21. David Graves,

    Sorry is my post came off as though I’m not in touch with the difficulties of some producers and distributors. I think I mentioned that things are more difficult than in the past. The media isn’t making it up, but they are overstating the problems.

    Your reaction, as well as that of Shane’s, is exactly what I am talking about in my second point. Those that are doing well just don’t want to say anything because those that are having stuggles aren’t in the mood to hear it. I don’t blame them.

    The fact is that 83% of the people in the country still have their jobs and have money to spend. The 17% that are struggling don’t want to hear about it so the 83% just keep a low profile.

    I think the fact that we are having this dialogue bodes well for the future(2011 and beyond). 12 months ago everyone was too depressed to even discuss the possibility of a brighter tomorrow.

  22. Interesting piece that draws into focus some difficult questions a lot of us don’t want to acknowledge. Should be interesting to see what happens at the barrel auction later this month.

    Looking forward to your panel at the Symposium.

  23. Brother Timothy says:

    Hi Steve, great blog as usual. Roger, just a short comment on the Bankers’ view. I believe that their view is not a random sample, because the banks are extremely careful who they lend to in the wine industry. Since they have such in-depth information on the wineries’ strategies, cost structures, earnings history, margins, debt ratios, etc, they can “cherry-pick” the most risk-attractive winery clients. So, they are having a much higher than average number of successful clients during this economic downturn. That is probably why we don’t hear them spouting gloom and doom.

  24. Hi Steve,
    I think David’s second point is accurate in many cases. Jordan ended 2009 up 5% in revenue, but we didn’t turn the information into a news announcement. I think I told maybe three people, one of whom was Patty Roth, who mentioned our success during the Recession in the current issue of Wine Business Monthly (tasting room traffic report story).
    Best,
    Lisa

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