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The middle’s getting squeezed

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When I was in Napa yesterday, I was talking to a guy who’s pretty tuned into the valley’s wine culture. Our conversation ranged over a variety of topics, not just wine, but the economy, politics, Occupy Wall Street, etc., and obviously we got onto the issue of the declining middle class, which seems to be the big domestic story in the country.

At one point, we were driving down Highway 29, through Oakville and Rutherford, looking at all those famous wineries, and I said that I often wonder how they’re all doing in this recession. I said I can’t believe they’re not hurting. My friend had actually read my post from a few days ago on “Why more wineries aren’t failing” and he agreed that the banks probably are holding back from doing more foreclosures; but he agreed also that even if the wineries aren’t going bankrupt or having to sell themselves, many of them are probably deep in debt and struggling, especially those whose retail prices are in the medium tier (hard to define, but let’s say $20-$60). The extremely low-priced wines, such as those produced by Bronco, some Gallos, Bogle, some of Don Sebastiani’s stuff like Smoking Loon, Woodbridge by Robert Mondavi, Red Truck and Big House are probably doing pretty well, because they make sound wines at around $10 a bottle, and that’s the sweet spot for consumers these days. But the middle class isn’t going to buy a middle-priced bottle these days, the way they used to, because they either don’t have the money, or are afraid to spend it.

“If you think about it,” my friend said, “the middle-priced wines are kind of like the Middle Class Americans. They’re both being squeezed out of existence.”

Middle class Americans are indeed under pressure, a fact that Republicans, Democrats and everyone in between can agree on (although solutions to the problem appear to be intractable). The problem with the mid-priced wines is that they’ve pretty much targeted themselves to Middle Class consumers. High end drinkers won’t buy them (I don’t want to get into naming specific brands, but think of the stretch of wineries from, say, just south of the Oakville General Store to Calistoga along 29. You can choose just about any one you want). High end wine drinkers want Harlan, Hundred Acre, Futo. On the other hand, the financially strapped consumer (student, blue collar worker, housewife on a budget, retiree) can’t afford $20 and up for their regular house wine, and so they turn to the cheapies. As a result, the more the Middle Class in America is pinched, the less wine the mid-priced wineries are able to sell to them.

It’s a vicious cycle, but I think my friend got it exactly right. These wineries have got to be hurting, but the banks are going light on them, for now. Things won’t recover for the mid-priced wineries until the economy recovers, employment starts rising, and consumers feel like they have some discretionary money to spend again.

I do want to comment on some remarks that Rob McMillan, who I think is a banker with Silicon Valley Bank, made on my “Why more wineries aren’t failing” post. Rob said “Only 7% of wineries describe themselves as being significantly weak,” which is a statement that needs examining. First of all, self-professed status reports, in any poll, are notoriously misleading, so I suspect that the percentage of wineries that are actually “significantly weak” is considerably higher than seven. Secondly, you’d have to define “significantly weak,” as opposed to merely “weak,” to understand this number precisely. Perhaps 67% described themselves as “weak,” but not “significantly weak.” These surveys all depend on how you ask the question.

Secondly, Rob wrote “grape prices are going up.” I suppose this could be true, especially after this vintage, which is going to be very low-yielding, by every account. However, the 2010 crop was a large one, the third biggest of the decade, and according to the California Dept. of Food and Agriculture, grape crush prices, measured as dollars per ton, were down considerably in 2010 from their 2009 highs.

Even if grape prices go up in 2011, such is the law of supply and demand that, if demand remains low for high end wines, it won’t matter. Soft demand will balance out high prices, which will put an additional squeeze on those $20-$60 wines. It’s all tied together: restore the Middle Class to fiscal health, and the mid-priced winery tier will recover.

  1. Steve, as someone who typically drinks “medium tier” wines, this post really has me thinking. Clearly many wineries have to be experiencing pain but outside of wine producing regions, did the typical “middle class” wine drinker ever really drink $40/50 bottles (on any kind of regular basis)? I don’t think so. I guess it would help to know what your definition of “middle class” is.

  2. I do ok, especially for my age and am solidly in the middle-class (but not a homeowner because of where I live). Still, I don’t buy much over $20 – $25, even though many of the wines I really want to drink are in the $30 to $60 range. It’s just too expensive to drink a few bottles a week at a cost of $60 to $100+

    So I think you are right Steve. From talking to several Santa Barbara producers who make a range of wines from $15 to $50+, their wines in the $20 to $25 range are doing very well and the higher tier is slow. In some cases, customers who used to buy the $50 wines now buy the $25 wines.

    I have also seen a few cases of highly regarded winemakers who typically price wines over $30 a bottle releasing new blends in the $20 range because they know that’s where the sweet spot is.

    The wineries I am friends with who sell all of their wine above $40 a bottle are actually doing very well, but in most cases it is because they are moving 3,000 – 5,000 cases a year tops, not tens of thousands. I can’t imagine how those $40 supermarket wines are doing. Not well I imagine.

  3. uff the fluff says:

    So this is all just conjecture? It seems quite difficult to know what to think without actual data.

    It’s not like restaurants have stopped trying to find bargains among the higher-end. Do high-end customers really drink nothing but expensive oak juice? Does the middle not splurge enough to support $30/bottle wineries?

  4. Kurt Burris says:

    I don’t think it is all conjecture. As a wine salesman I can point to my commission checks. A couple of years back when the stuff hit the fan I was representing Grgich Hills. Great wine, but not trendy. The high end score chasers didn’t want it and the midpriced consumer was buying down. They have been around long enough that I’m sure their financials are in order, but it’s hard out there.

  5. Dear Jay M., I don’t know what the parameters are on income for middle class, but most people I know make between $75,000-$125,000 a year, and they would rarely spend $40-$50 on a bottle of wine. Still, it’s fair to call those wines “middle tier” because there are a lot of California wines from $75 and up, which I would call the upper tier.

  6. Steve –
    Thanks for the mentions. It’s really great to have this perspective out there on the interwebs because it’s a common myth. It’s just a feeling that people have and feelings can be deceiving when they aren’t supported with research or fact. So I sincerely appreciate your willingness to throw it out for debate.

    If you haven’t yet read this year’s Silicon Valley Bank Annual State of the Industry report I would recommend that you take the time to read it …. Particularly if you’re a fan of the late Leslie Nielsen; star of that smash hit Airplane. (.. you have to read the report to get that one): http://www.svb.com/2011-wine-report/

    The 7% number that I cited is from Figure 15 in the report. It’s the sum of the 600 wineries who reported themselves as significantly weak or worse (the slide says “very weak”…. I was going from memory.) Total of all wineries who report themselves as any shade of weak is 23.37%, not 67% as you wonder.

    You should question self-reported numbers. I certainly do. Note that there are financial benchmarks in Figure 13 of the SVB Report. Those come from the roughly 350 or so wineries that we bank and many others that we don’t bank. Since we have actual financial reports, we do have more than a guess on the financial condition of wineries and the level of those showing weaknesses. The self-reported numbers do in fact align pretty closely with our own financial data base.

    My present take on the business is it’s recovering and growing slowly. Bottle prices are firming, but there is no sense of seeing the prices that were paid for wine on the whole in the 2006 time frame. Prices have in fact reset so every day is in some ways a sale day now for the consumer.

    With respect to grape price increases and the general supply in the market, Turrentine Wine Brokerage and the Ciatti Company handle most of the brokerage of grapes and wine in California. Bill Turrentine does an excellent job of summarizing the market activity in a quarterly newsletter. The Readers Digest version is that the market is now balanced to short largely, and grape and bulk prices are going up. But Bills report is a pretty easy read as well: http://bit.ly/tgqMNc

    Please keep up the good work!

    RMcMillan@SVB.com @SVBWine

  7. You’re right steve… The middle class and mid-priced wines are getting squeezed… Unfortunately, the wine world is completely messed up thanks in large part to YOU and your corporate handlers… You asked me 4 years ago what I meant by calling you “corporate”… get it now? I doubt I’ll see you on the Oakland streets… even though the riots will happen in YOUR BACKYARD… See some of you on the streets…

  8. Hey Randy, I was out there in Oakland on Wednesday. Where were you?

    I know. Back home in the country where the closest thing to a protest is the mold on your grapes.

  9. Our wines are priced between $20 and $50. I don’t ask our customers what their income levels are, but the demographic trends young and professional for us so I am going to assume that we aren’t seeing “the 1%” in our customer base.

    2008 was a weak year – revenues were down 22% from 2007 with Q3 & Q4 showing the worst performance. The following year (2009) was miserable as the Great Recession continued. But our revenue more than doubled in 2010 and year-to-date we are on track to double again in 2011 – to above pre-recession levels.

    I’ve heard the same story from other small winery owners making wines priced in the same range: sales are up from the recessionary lows. We’re cautiously optimistic that the trend will continue.

    No question sales are still tough, especially at the wholesale level. I don’t have any doubt that some wineries are struggling out there. But I believe your premise, that consumer have no appetite for wines in the middle price range, is wrong.

  10. Pedro Vargas says:

    Nice story. But, mid tier squeeze is very common in all markets. WalMart, Costo, Target, Pennys etc. have all gone through this. That is why product segmentation and brand alignement are so important – before the product is launched. Even in good times, people will gravitate to higher or lower tiers….the middle tier is always in a metastable state.

  11. A few stats to spice up the conversation…

    The middle 1/3 of households in the US would be range from about $35k to $75k in income. The mean Household Income for core wine drinkers (1+ a week) is $73k. Nearly ¼ of them are over $100k. On the Wine Opinions panel (representing the 18 million high frequency/high involvement wine consumers), it’s 44%. We probably shouldn’t conflate the middle class of wine consumers with the middle class by most economic definitions.

    What’s the “middle class” of wine production? For most wine consumers, the line between casual consumption and splurging occurs somewhere between $15 and $30. $50+ per bottle, while a segment of great interest for many small Napa wineries, is a tiny fragment of the market. Even among high frequency, high involvement wine consumers, one third of them state they never buy wines over $50 and only 27% buy them more than a couple of times a year. In contrast, 44% of them purchase wines $20-30/bottle retail on a monthly basis or more often. Based on our research, high frequency wine consumers break into roughly 2/3 who do most of their purchasing at $10 or under, splurge regularly at $10-20 but infrequently above $20; and 1/3 who purchase mostly $10-20 and splurge regularly $20-50 and occasionally above that.

  12. Pedro, what you say is true. But in normal times, these $20-$60 wines do pretty well. The 2011 squeeze is the most severe I’ve ever seen.

  13. Great article Steve and I am certain there are winery owners and corportate executives sitting on a lot of inventory. They know first hand the pain of trying to market their product in this economy.
    People will still collect age worthy wines if they can afford to do so and will also purchase wine to consume at home, but I believe that there has been a decline in people buying $20-$60 wines to “cellar”. There is a lot of wine out there to buy on sale so why tie up cash on wines that will not necessarily improve substantially over time.
    Countless “middle class” Americans appreicate fine wine and will splurge on a $50 bottle of wine for a special occasion. In this economy it is easy to understand why they are looking hard for a $20 bottle of wine that can fill that roll now.

  14. Steve, let me be the first to contribute to your anecdotal poll; if you can get 500-1,000 of these you’ll have “real” science.
    I see the middle class challenge in buying wine as I see our challenge to buy food; I (Middle class) find myself buying store-brand butter, 85% hamburger with the store’s desperate (Before the expiration date) coupons, everything on sale: Lobster $3.99-$4.99 per pound, rib-eye $5.99, and Murphy-Goode Pinot $9.99. Since I’m so boring, I tend to veer into expensive wines as well.

  15. The middle class is being squeezed and in danger of disappearing. I think many have cut back on the amount they will spend for wine and other items as well. I know I have!

  16. The grape price number per ton is an interesting number. Most brands that source grapes are trying to get the price down. The Grape report from California shows price by county, AVA etc. But the numbers are not accurate in that if I am a grower and producer of wine, I can set my own price and drive the average up. MANY, MANY folks do this. Example: I have xyz acres and I sell my grapes to myself for this $$ per ton. Then next year or a couple years later I need that entity to make more or lose more $$, so I change the price. These prices get reflected to the average of the grape report. Many grower would love to have the “average” of the AVA for a specific varietal. But a good buyer needs to know their market, what they can sell their brand for a buy accordingly.

    I can only imagine how many TONS of grapes are dropped on the ground each year because they couldn’t get the price they wanted or couldn’t sell the grapes at all!

  17. I think that wines in the middle are being squeezed, but I also believe that Rob McMillan is spot-on with his assessment of the health of the industry. Recessions don’t put wineries out of business, unrealistic business plans do.

    There was a time a couple decades ago when banks, insurance companies, limited partners, and other sources of capital made silly decisions on who they invested their capital. They learned to be far more careful and look at the business plan more critically. The Vintech collapse two decades ago was a great textbook case and learning experience. Banks are a lot more careful now than they were. Doctors and dentists aren’t throwing their money at limited partnerships. Much stringent requirements to raise capital with sale/leaseback arrangements. So today, while the recession has affected sales and many wineeries are making less money, they will ride this out because their businesses are built on more conservative and realistic plans.

  18. Steve Howe: me too! Good luck to you.

  19. David – Table 10 (prices per ton by district & varietal) in the crush report is supposed to cover only independent transactions. The report claims that “Grapes pooled by cooperatives, those grown by processors and used for their own production and grapes crushed to growers’ accounts are not included.” So in theory, price data without the distortion of transfer pricing is available.

  20. Charlie,

    We must have past eachother on the streets, as my family and I were there too until it was close to bedtime for the little one. No, we actually put our bodies where the mouths are…

    Mold? Not much as you know I harvest well before most, thus making lower alc wines have their benefits, eh? No, mold is rarely observed at my crushpad, unless it’s a year for late harvest zin.

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