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Dead cat bounce for wineries?


Just when we thought the U.S. had rounded the corner of the recession, there are renewed fears of the notorious “double dip” (or, more colorfully, the “dead cat bounce”) of the economy’s performance. The Dow Jones stock index has fallen more than 1,000 points since April, triggering a new mood of gloom. Financial problems in Europe seem to be the proximate cause of the problem. Not being an economist, I’m not in a position to analyze what’s going on; not even the economists agree on the causes. But “recovery,” whatever that is, does seem agonizingly slow. Not only is the stock market in trouble, unemployment remains stubbornly high. Banks still aren’t lending; people still aren’t spending. It all adds up to what Thomas Friedman, in the New York Times this past weekend, calls “the new pessimism” in America.

Friedman casts his gaze over the economic landscape and perceives some pretty dire things. Consumer prices continue to fall, leading to the prospects of deflation. I used to think deflation was a pretty cool thing, as it would make the things I want more affordable. But no; Friedman calls deflation “really bad news” because it “tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation.”

This isn’t particularly good news for the wine industry. I sometimes look back over the last twenty years here in California in total wonderment. How have these thousands of wineries all have managed to survive? Somebody should write a book about it. The top-of-the-head answer is that the 1990s was a time of such economic boom that almost any winery owner, no matter how lame, could make money simply by riding the expanding economic bubble.

But just behind the shiny surface of that bubble, there always lurked a troubling spectre: debt. Winery owners are no different from the rest of us. They have debt; the only way they can pay their bills is to sell product at a profit. So what happens when “people…hoard cash rather than spend”?

Krugman himself doesn’t have an answer. He suggests he’s in favor of Stimulus II, but acknowledges it “would have no chance of getting through a Congress that has been spooked by the deficit hawks.” Short of that, all he can come up with is “hope [which] is not a plan.”

I doubt if many California wineries have a plan, either, to ride out the next several years, which Friedman says could resemble Japan’s infamous “Lost Decade” of the 1990s. Many are hoping that the Internet and direct shipping will come to their rescue, but of course, it won’t. Others play the old game of reshuffling their sales and marketing teams, but that increasingly seems like re-arranging the deck chairs on the Titanic. Some strike off in the direction of new varieties they hope will excite consumers: Nebbiolo, Trebbiano, Pinotage. Others place their hopes on labels that jump off the shelf, or cute proprietary names. Winemakers travel more than they used to, schlepping from city to city to meet with clients, trying to persuade them to buy a case or two. If it’s Wednesday, we must be in Cleveland! P.R. agents court writers like Romeo crooning to Juliet on her balcony. Stores try to figure out how to position wines so they sell, what names to call the aisles, what to put in the window to lure shoppers in. The big wine companies are bringing in experts from other industries with a proven track record of sales. Everybody’s trying to game the market. It’s crazy.

It’s tempting to predict that, if anyone survives, it will be the big wine companies like Gallo, Bronco and Constellation, because in the past, they always have. That’s probably true, especially with private companies, which don’t have to satisfy shareholders and thus can steer a more controlled course. But we’ve seen big companies hit the ropes. (Hello, Foster’s! And does anyone remember Heublein?) Then I think of the thousands of small family wineries, from Temecula to Placerville, Salinas Valley to Mendocino, Lodi to Lompoc, and I really have to wonder if they’re going to make it through America’s Lost Decade. I hate to sound gloomy, but I am. There are also lots and lots of really nice wines from foreign countries that cost much less than even mediocre California wines that tend to be high-priced. Why would anybody pay more for less? There’s nothing deader than a dead cat bounce.

  1. Steve,

    One of the things that I am hearing about, as far as strategies go, is a number of wineries (smaller and medium-sized) bowing out of grape contracts. These wineries are seemingly trying to take a year or two off from making wine. Instead of going out of business they are hoping to go into a “hibernation” of some sort. If they want to continue to have a place in the market they are looking at buying bulk wine (at cheap prices) and coming up with an Appellation blend rather than continuing with single-vineyard wines.

    Adam Lee
    Siduri Wines

  2. Carlos Toledo says:

    Steve, low entry barriers should lead to none or very little profit. Its opposite it’s also true. So goes classic economics.

    The big guys should be left standing up and ruling the market once the tide is low. The little ones can be split into two divisions (that i remember of): The ones who only make a living off that winery and those who have several businesses and have wineries (or even churches) to harvest tax breaks. They can afford to keep up a winery at a loss. Some may even love an accountable loss, some even may cook a loss.

    I’m sorry for the very talented ones, those who could do a huge difference anytime. Who could produce wines to be written about. I’m sorry for those who quit jobs thinking having a winery is the best and safest thing in the world.

    In the country where i currently live the small wineries situation is devastating. And to worsen matters some folks only know how to produce wine. They are completely clueless when it comes to selling, marketing, delivering…

    Over here the big ones are to win the market. And we’ll have the Mc-wineries producing crappy wine at huge price.

    It’s happening.

  3. Carlos, I know veteran winemakers who have lost their jobs and can’t find new ones. They’re “consulting,” which is the code word for “unemployed and hoping someone will hire them for something.”

  4. Adam, I’m seeing a huge flood of brands I never heard of, bottled or cellared by companies I never heard of, from addresses in Healdsburg or St. Helena and places like that. I wonder who they are: new investors buying up bulk product, or existing wineries dumping product at giveaway prices? I wish the labeling laws were stronger so that we could know the precise source of these wines.

  5. Steve,
    Thomas Friedman is a journalist/editorialist for The NY times. You’ve probably mistaken him for the late Nobel-winning economist Milton Friedman. No wonder Mr. (Thomas) Friedman’s views are so naive and flawed, with silly statements like this: “[deflation] tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation.” The only bitter effect of deflation is that it increases debt in real terms. Otherwise, it is merely the adjustment of prices to a falling demand for goods (and services), and/or a rising demand for money.
    The truth is we’re experiencing a crisis that was caused by an excess of credit, which led US households to an excess of debt and consumption. Now, politicians and their hired pundits are trying to convince us that the solution to an excess of credit-debt-consumption is more credit, debt and consumption…
    Can you truly believe that? Is that what you would say to your family? “Hey guys, we’re deep in debt, and we can’t afford to pay the mortgage and the bills. So let’s borrow more money and spend more. Then everything’s gonna be just fine!”
    My guess is that you’d try to cut spending and increase savings, to make ends meet.
    It may sound cruel, but the only viable solution to any crisis/recession is to let the market do its job: wipe out bad entrepreneurs, who made the wrong decisions; and grant greater opportunities and market share to efficient/savvy entrepreneurs who did the right thing.
    When bureaucrats and politicians succeed in preventing this creative destruction process, that is innate to market capitalism, they’re just postponing the inevitable doom.

  6. Steve,

    I think a lot of wineries are dumping bulk wine — selling it to existing companies, which register a new brand name, and then sell it off cheaply. If you want to see the large quantities of bulk wine on the market you can check out some of the offerings here:

    It gives you an idea of the scope of the over supply.

    Adam Lee
    Siduri Wines

  7. Peter, you’re right. My bad: I was thinking of the NY Times’ other columnist, Paul Krugman, who won the Nobel. I have since corrected the post. At any rate, you say “My guess is that you’d try to cut spending and increase savings.” Which is exactly what Friedman said! Deflation “encourages people to hoard cash rather than spend…”. I believe that. People are NOT spending, and may not be for years, which is precisely the threat to California wineries.

  8. You’re right, Steve. American people are not stupid.
    But ask Mr. Krugman and politicians what they think.
    They think the solution is to bailout bankrupt enterprises and increase liquidity and credit, so that banks can lend more money and people can resume spending.
    What is incorrect, though, about Mr. Friedman’s statement, IMHO, is that deflation (i.e. a fall in prices), is not a CAUSE of “cash hoarding”, but the consequence of the “price adjustment mechanism of the supply-demand curve”; that results from the correction of a long period of excessive debt and consumption, associated with the perception, by economic agents, that the future is uncertain.

  9. I used to be a professional economist. Did it for twenty years, the last ten of which overlap with my first ten writing about wine. Thankfully, you have realized that Tom Friedman is neither Milton Friedman (a conservative economist who got more wrong than right because he was idealogue who let his philosophy get in the way of his brain) or Paul Krugman who is, to my way of thinking, the pre-eminent economist in the US today. I don’t see the correction in the text. You still talk about Tom Friedman and Paul Krugman. Which one are you quoting?

    Second point, if you and I were sitting around a wine bar somewhere, getting happy and having an economics debate among all the other topics, we would be visiting, I think I would not choose the term “dead cat bounce” because that is not the phenomenon that might happen. Not to put too much spin on it, but a dead cat bounce is when one gets an artificial uptick on the way to the true bottom of an experience–be it the stock market or the economy or wine sales.

    Clearly we are not anywhere near a dead cat bounce in the stock market, and with every indicator that wine sales are rising, we are not so far seeing anything that looks like a false rise in sales. More than that, a dead cat bounce would be a false rise, not a rise and dip in response to more ecnomic news.

    So, what we have here is potentially a new round of economic downturn, this time brought on by the failed economics of the PIGS as they are called (Portugal, Italy, Greece and Spain) whose borrowing relative to their GDPs are substantially higher than the U. S. or the rest of Europe. The profligacy of those governments make the U. S. look like genius over the last year and a half.

    Finally, on the big picture. The stimulus spending the U. S. did was critical to keeping us from having an even worse downturn. Do not believe those false prophets who argue that the market needs to do its thing with no intervention. That is what Herbert Hoover thought, and it is now well established, by no less than Krugman himself, that Hoover’s policies led inexorably to economic disaster.

    There is a lot more to be said about this, but I am now a winewriter, and I will return to the topic. Wineries, as you have so correctly pointed out, Steve, are weathering the storm pretty well. There are many who are not, but with over 3000 bonded wineries and another 2000 (and rising) other labels ranging from negotiant to opportunist to dumping grounds, it is not like we are seeing a wholesale retreat. In part, it is because wineries are a rich man’s game, and in part, it is because many wineries made big, big profits in years past and have a cushion to see them through (this is how agriculture has traditionally worked–save for the Great Depression–and if we get one of those, then the rate of failure among wineries will worsen along with everything else).

    Point being, it is too soon to know if the problems in Europe will push the economy down again, but there is already some evidence that Europe has already taken the steps to bail itself out. And if that is so, then wine sales are not going to take a second big dip.

    There are not happy times economically, and Krugman is right that a second round of stimulus would be good for the economy in general. But he is also right that the current political climate makes it unlikely. But things will have to get a lot worse from here on out before we see massive failures in the wine biz. When I see a winery cutting the price on its $160 Napa Cab to $99, I know it is having trouble selling the wine. I also know that it is not losing money. When I talk to an urban winery and the owner tells me he is buying less $5000 Syrah this year, I see that as an appropriate reaction. Sure, the grower will lose sales, but his biz model never contemplated $5000 Syrah in the first place. He may lose money in 2009 and 2010 but he made massive profits for years. He is still laughing–or ought to be.

    Things might get bad again, but there are not yet at that point, and it will not be the U. S. economic picture that pushes us there. We are, however, closer to a Lost Decade if we do not find ways to make the economy grow. The false prophets also forget that the Japanese followed the Hoover model and that is why they stayed stagnant so long.

    Apologies for the lesson, but my sense is that the greatest danger to our economy is not excess but Hooverism. And that prospect scares me for a much bigger economic picture than just what will happen to the wine biz.

  10. Morton Leslie says:

    Silicon Bank estimates last month about 7% of the wineries are in poor shape and 72% are in Good or better than good condition. About 30% of wineries indicate a surplus of inventory, 10% a shortage of wine, and 55% are in balance. Sales in Q409 was much better than Q407. And about 30% of wineries indicate a Retail sales at tasting room is way up. Overall direct to the consumer is up. Restaurant sales down significantly.

    What is interesting is that their report shows 60% of Non-Napa wineries and about 46% of Napa wineries have been around less than 10 years. And 25% and 15%, respectively, less than five years. This is probably where the bubble exists and wineries are stuck with high prices for land, grape contracts and borrowed capital. About 70% if Calif. wineries indicate capital is harder to come by according to their report.

    Not great news, but it doesn’t appear the wheels are coming off.

  11. Carlos Toledo says:

    Veteran winemakers with the hats off? Right at the moment i’m seriously thinking of changing life again and take a nice winemaking course in Europe.

    So… that’s how a hard time is supposed to feel like…

  12. Steve, I’m sorry but you forgot to mention that our average american consumer is on some form of govermental life support right now.
    What happens next year when the bail out money is all gone?
    Will people receiving unemployment for the past 2 years, get extended again?
    What is going to happen when home prices decline again, as the tax credit has ended and new defaults are still happening at “code red” levels.
    I don’t think consumers are any more frugal than they were a few years ago. No, they just have less money, approximately 30% less money on average.

  13. Ah… what to pair with dead cat….? 😉

  14. Welcome back from France, Dude!

  15. Thanks! I survived French logistics, which I found out is actually an oxymoron (sorry for those who are French – you make amazing wine & food but I wouldn’t want you to plan my daughter’s wedding :-).

  16. Dude, then don’t let her marry a frog!

  17. Sherman says:

    What to pair with Deceased Feline? Why, a nice Sauv.Blanc with, of course… (wait for it)…notes of cat pee!

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