Recession: it’s not the end of the world
To hear it the other day from Asimov, at The Pour, California’s wine industry is on its last legs. On Tuesday he blogged that “the effect of the recession on their businesses [is] brutal” and “anxiety is gushing forth.” Today (yesterday, as you read this) he declares that California growers, producers, distributors, retailers, brokers, equipment dealers and consultants are “anxiety-ridden,” as they see bottles and bottles of expensive wine that have “lost their glamour.”
I know times are tough, but I don’t think California wine is in a state of collapse. As I’ve noted in the past, history tends to repeat itself, and you have to look no further than Bordeaux to understand how that venerable old wine region has sustained itself through centuries of repeated wars, economic collapses and even revolutionary changes in France’s government. Most wines did not go away, they simply adjusted their prices in bad times and jacked them up again when boom times returned. A surprisingly low number of chateaux actually went out of existence; just look at the 1855 Classification, which contains most of the names we know today.
Every wine region is in a state of turmoil now, and California is clearly no exception. But let’s not lose sight of the silver lining around the clouds. Producers of lower-priced wines are doing fine, and by that I mean everybody from Fred Franzia and Gallo (at their value levels) to some mom-and-pop operations. We haven’t seen any massive bankruptcies or sales; certainly it’s no worse, so far, than in the early 1990s, when similar gloomy predictions were being made. Winemaker passion hasn’t waned, nor have the improvements that have been invested in vineyards and wineries over the past years, made possible by the Golden Age of profitability that marked most of the Clinton and Bush years. Wineries will get through this difficult period — most of them, anyway — just as you and I will, by ratcheting down expenses, renegotiating loan agreements, and the like. It’s a terrible recession, but it’s not the end of the world.
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I’ll be gone all next week. Going to New York for Wine Enthusiast’s annual summer editorial meeting, when we plan out the next year’s issue, and also put our heads together trying to figure out how to make the magazine better and more satisfying for readers. I’ll try to blog from the road but it’s not easy, as we’re kept pretty busy all day in meetings and with dinners (and lots of good wine) at night.
Have a great week!
Steve,
Thanks for the blog. I appreciate the sentiment. And while I agree with much of it, I do believe that to say that wineries are “anxiety-ridden” is not an exaggeration. If only there was a Perez Hilton (can you believe I am wishing for this?) of the wine business, he/she would have a full-time job reporting on wineries, growers and the rumors about them.
I believe that there are a number of factors that you need to keep in mind when looking at this recessionary period compared to previous recessions and its effect on the wine business…some are in a positive light, others not:
1) Never before has wine been such an integral part of American culture. More Americans are drinking wine, there is no stigman associated with it, and this trend doesn’t seem to be declining with the state of the economy.
2) Many European countries choose to subsidize their grape growers. Much as we subsidize wheat growers in the mid-West, they subsidize grape growers. This makes comparing what happened in Bordeax, as an example, to what will happen in California a difficult exercise.
3) There are an inordinate number of smaller growers now whose 401ks have all but vanished and they are suddenly looking to their vineyards for income. This probably won’t happen.
Adam Lee
Siduri Wines
It’s good of you to offer some perspective on this, Steve. I recall when Swine Flu was coming and it was the end of the world then, too. When’s the last time someone brought it up in conversation other than my example just now? Probably a while ago. The point being, it’s easy to fall into the trap of bad news when that’s all you’re hearing, but you can’t just take the news for what it is.
Consider yesterday’s news, yes, I’m of course mentioning history itself. We’ve had our ups and downs. Every generation I’m sure lived in equal states of fear and ecstasy about how theirs would be the best or worst era in history. We can shape how things are viewed when the going gets tough–that’s our own responsibility. Personally, I prefer not to be the one screaming over how the sky is falling–I’d rather focus on finding the cover (or solutions) to ride it out until the good times roll back in.
Adam, I was trying to do a little cheer leading. I’ve been hurt, too, but we must never stop being optimistic!
Steve,
Don’t get me wrong….I appreciate the cheerleading. But I also think it is important to look at what is different this time around as compared to the mid 1990s. Some things that are different, such as consumers drinking more, are great. Other thngs aren’t quite as favorable.
Adam Lee
Siduri Wines
This time around we have vastly more producers chasing consumers. Yes, consumption is up too, but at vastly lower price points. Consumers are discovering that they can enjoy Fighting Varietals (and Trader Joe’s imports) just as much or almost as much as they can wines over $20. The Siduri/Novy wines will manage to stay in the game because they’ve had the time over the past decade to develop loyalty and standing. I don’t see how newer brands can survive.
Just saw that rack rates in Vegas are down big time. Convention attendance is down big time. Occupancy rates are down big time.
No surprise that wine sales are down. But I remember what Joe Heitz told me once when he had a vintage that did not sell out before it became time for the new release. “I’m not too worried about it. It is like a million dollars worth of future income. It will sell some day”.
Wineries like Siduri with so many small lots will find that some are slower than others, but I will bet my eyeteeth (yes, Adam, you can have them if I am wrong) that Siduri will come out the other side of this downturn in tact and, if it trims at all, will trim excess not bone and muscle.
This is not a new story–and each economic downtown has its own narrative, but the overall sales of CA wine are not down by as much as the market or the Vegas rack rates. This too shall pass, and Asimov’s anecdotal evidence was too one-sided for my liking. Any one of us could produce a hundred comments about the downside. That is what story-telling is about. It is not what hard economic reporting is about. It would be unfair to ask Asimov to be a great economist in addition to being a great writer–so I am not going to and don’t think we should rely on him so much as on hard facts, not anecdotes.
Let’s face it. The current economic situation is the most dire since the end of WWII. Domestically, there has been several severe recessions in the post-war era, but what sets this one apart is that it’s world-wide to a much greater extent than seen previously. We’re not out of the woods yet, but there are signs that perhaps the worst is over. With my winery, it’s possible that I’ve survived the recession, which leads one to ask, can I make it through the recovery? Americans are optimistic, so I’ll stay at the helm whilst navigating through some rough seas. Hope the damned bilge pump works!
David: Good luck to you, and to all the wineries.
I just took advantage of the clunker program, junked my pickup, and bought a new car. We need a clunker program for wine, where we can turn in all those 16% alcohol cult wines in our cellars for something that tastes good. Maybe we recover the alcohol to blend in our gas.
Economic change is like climate change, there are winners and there are losers. The winners are those that are prepared to take advantage of big intense high alcohol reds aged in the best oak that will be available in bulk at prices that are a fraction of what it cost for the grapes and winemaking. Great blending material if you have some inexpensive light bodied wine. Among the losers will be some of the four dozen wantabe “cult” labels that are for sale right now when they find the only thing they have that anyone wants is their bulk wine at a steep discount. (Oh, Franzia will need some brand names that people associate with the Napa Valley.)
I am reminded of 1982 when a family named Benziger had a bottling operation in Glen Ellen and a brand by that name. They would buy for $3 a gallon wine that cost us $10 to make, pay us to store it for them, and then when they needed it, ship it to the bottling facility where it was blended with wine from all over and bottled into a wine that sold for $24 a case wholesale. “Private Reserve” I think it was called. It was good value.
To me what is different is there are not only many more brands, but too many making over-the-top wine that, aside from the 100 point critics, few find enjoyable to drink. When the wine no longer offers to enhance your self image; all that is left is the way it tastes.
I like the perspective. You’re right, let’s everyone take a deep breath. This too shall pass.
Ash
Steve,
It’s just another form of Darwinism. While the public will get a massive amount of great wines at ultra-low prices courtesy of such retailers as Trader Joes, BevMo, Total Wine, Costco (plus the killer deals that can be found in tasting rooms!)…, some wineries will not be able to withstand the fact that they are loosing a massive amount of money. Many wine drinkers are not that brand loyal and once they pay $14.99 for it at TJ’s, they probably will not be willing to pay $40 for it later when things turn around. Some wineries are betting the public has short-term memory and will not remember the discounted price–and some of those wineries might be right–but our winery landscape will look significantly different when this is past. The brand names might remain, but the ownership of that brand might very well be differnet.
If one looks at the turmoil in the financial services sector or the automobile sector, the changes in the CA wine landscape look small indeed.
To be sure, if it is happening to your winery, it looks massive, as it does to anyone whose job or business has been affected, but the wine business is amazingly stable relative to a lot of small business sectors. Try being a small, up-scale, one-off restaurant in this market.
Economic Darwinism is one of the inevitable consequences of capitalism. When things are going well, wineries can sell all they make, sometimes at amazing prices that make rich men even richer and ordinary folks into rich men. That also is a consequence of capitalism.
There will be upsets in the wine business. There always have been. Mostly they affect wineries that either make wine that is not good enough to sell for the prices being asked or that simply have no idea how to sell the wine they make. Unfortunate choices like doubling the production of your $60 Chardonnay at exactly the same time as the wine markets turn soft will turn out to be unfortunate for you.
But, neither Steve E. nor any other Steve will be tossed out into the streets unless their products are simply the wrong stuff at the wrong time. With the supply of CA wineries now passing 3,000, I doubt that consumers will be short-changed by the passing of a few wineries that could not compete for all kinds of reasons. More likely, by the way, that K-J or Diageo or Constellation or one of the smaller winery groups will buy up those brands–that is if the Kingdom of Freddy Franzia does not get there first.
I thought Asimov was ducking and covering too quickly, as well. But one thing to me is clear: when your home and stock portfolios drop that much in value, you tend to batten down the hatches. Americans are saving at a greater rate than ever, albeit in my opinion, not nearly enough still.
Our economy is consumer-based and needs people to spend their money to keep growing. If the wallets are closing up, of course us wineries will feel the pinch. The challenge is to see your way through by playing to your strengths as well as cutting costs and providing better discounts where appropriate.
The wineries that are too debt laden, did not pay attention to their costs, and have poor sales and marketing hygiene are the ones shaking in their boots.