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08.26.2009

Small Signs of Troubled Times in the Top Tier of Wine

I'm not the most plugged in person when it comes to the California wine industry. I'm not a buyer, a salesperson, or a marketer, and certainly have no real visibility into what's going on behind the scenes at any wineries, even with a fair number of winemaker friends.

Consequently, I'm a bit of an outsider when it comes to measuring the impact of this recession on the California wine industry. But the picture that I'm starting to piece together from tidbits here and there is somewhat sobering -- not the calamity that is the U.S. Auto Industry, but certainly what looks like a correction, especially at the top.

In short, it seems that this is a really bad time to have your wines cost more than $100.

Just a few recent data points:

Today I attended a high-end Burgundy tasting. The owner of the distributor putting on the tasting told me that prices were down nearly 20% for these wines (many of which retail for more than $200) and that this was the first time that they ever felt like they needed to hold such a public tasting for wine buyers in order to sell what they had.

Over the weekend I attended the Family Winemakers tasting event, which I have done every year for the past five, and in addition to there being a little less excitement in the air, I noticed the presence of several very-high-end Cabernet producers. These are producers that I've never seen at such a large public tasting before, and certainly producers that in the past haven't had any wine to sell to the public anyway, having all of it snapped up off their mailing lists.

Speaking of mailing lists, I took my own advice recently and signed up to be on the waiting lists of a few wineries whose wines are sold almost exclusively to their mailing lists. Two or three months later, presto! I'm on. These are waiting lists on which people have waited for years before getting a chance to buy a couple of bottles of wine.

And finally, the prices may be coming down. One of the aforementioned high-end Cabernet producers is selling at a 25% discount to last year's release price, and I have heard of a number of other such cuts.

I'm somewhat ambivalent about all of this. On the one hand, people are clearly having a hard time and are definitely suffering financially. On the other hand, I think the wine industry, in particular the high-end of the California wine industry, was as due for as much a correction as the overall economy was. 25% price cuts probably aren't really enough, at the end of the day.

Someone in the industry could better say than I where we are in this correction. Given the slow, cyclical nature of wine, where investments made are not borne out for years sometimes, I wouldn't be surprised if things get a lot worse before they get better. Or perhaps given that margins aren't all that big in the industry, all the pain was felt up front, and as long as the economy continues to improve from this point, there's light at the end of the tunnel.

Comments (13)

1WineDude wrote:
08.27.09 at 6:16 AM

So... assuming you're now on mailing lists for DRC, when are you inviting me over to share a bottle?!!???

darbster wrote:
08.27.09 at 6:56 AM

I agree that the industry was overdue for a correction. I'm worried though, that California hasn't seen the worst yet. The 2006 (great) and 2007s (Vintage of the decade?) will potentially buttress producers for the time, but what will happen when vinters have to unload that dreadful 2008 juice? We can only hope that the economy is well into its growth cycle by then...

Dylan wrote:
08.27.09 at 7:22 AM

There's always been light at the end of the tunnel, it just depends on how long the tunnel was going to be.

Terry wrote:
08.27.09 at 9:53 AM

My perspective of what's happening is as follows. Wines that have spent 10-15 years building the price point on there wines are getting very scared and hacking up to 80 dollars off their bottle price(check out some of the offerings on kl wines and you'll see what I'm talking about). This is due to, amongst other things, wholesalers tightening their belts. The bean counters at these giant facilitators of booze are looking at the left over stock in their warehouses and kicking back the highest priced, slowest moving inventory, mainly super premium wines. It matters not to these accountants that this wine enriches their portfolios or the wine menues of the retaurants they cater to. Nevermind the fact that in the current economic climate people are becoming less enthusiastic about 1000 dollar white glove dinners and are instead opting for 500 dinners with egg-shell gloves. The end result is that the top tier of Napa and Sonoma vitners are getting stock kicked back to thaem from their wholesalers. By and large they are not suffering significant losses on their DTC fare but are being forced to reallocate wine from wholesaler channels (sometimes over 60% of their buisness) to direct to consumer buisness. In short these premium wineries are not losing their preffered customers they are simply puring more wine into those channels (ie: clubs, allocation lists, public tastings etc.)The reason your seing wine discounted heavily in retailers is that some wineries don't want to spend the effort getting their wines direct to consumers and are instead discounting wine to wholesalers who probably don't care about the integrity of their brand.

Wow I rambled on a bit there but I hope you get the gist.
ps. Long time reader, first time poster - Great Blog.

08.27.09 at 10:12 AM

I think a portion of the pricing correction will come as the result of less wine being produced this year and next. High end grapes are cheaper than I remember and available! When lower production levels meet lower demand it may help to slow the free fall of wine prices in the $40+ bottles.

tannic wrote:
08.27.09 at 11:04 AM

@ Terry - very astute points on the distribution chain both belt tightening and forcing inventory upstream.

@ darbster - that's a little irresponsible to label 08 dreadful. Have faith! We just blended our 08 reds and re-barreled and their damn good. We had no smoke issues or shatter in our reds. 08 Chardonnay was hit bad with frost but who really cares about Chardonnay? ;)

I will add to the original blog's topic in the area of foot traffic. It's down considerably in addition to sales conversion rates. Sure, summer has more looky-loos just tasting and leaving, but I can speak for our conversions v. same periods in previous years and it's slightly off. Having stated this, revenue is up...go figure. We're doing more outreach and have more time to spend with our best customers and the extra layer of service is reaping sales rewards.

Morton Leslie wrote:
08.27.09 at 12:14 PM

These observations are on the mark. In the $100+ sphere the appeal is strongly scarcity and exclusivity. Dropping the price or becoming broadly available to anyone just for the asking defeats the much of the appeal. Those that chose these options are in peril. But the appeal of luxury products is deep in the human psyche and those that were firmly established in image, reputation and were highly profitable will now just be profitable and will survive to live another day. Those that were barely profitable and hardly established will disappear...pronto.
The effects on grape prices and vineyard value will not be immediate, but we will see it over the next two years.

Fred wrote:
08.27.09 at 1:20 PM

Terry’s comment -- “The reason you’re seeing wine discounted heavily in retailers is that some wineries don't want to spend the effort getting their wines direct to consumers and are instead discounting wine to wholesalers who probably don't care about the integrity of their brand.” -- underscores the fragility of these so-called brands (really just labels) and the short-sightedness (laziness) of their owners.

Of course wholesalers don’t care about a winery’s brand integrity. Sure, they may trade on it, but they can’t be expected to nourish it when short-term revenue is at stake.

The irony, of course, is that everyone’s revenue takes a hit in the long term when brands are starved.

So what’s a luxury wine brand to do? The smart ones are investing in their customers -- be they tasting-room, wine-club or e-commerce. They’re discounting in ways that deepen these relationships. They are rewarding loyalty, recognizing their best customers with bundled offers that, mathematically, are discounts but psychologically are much more valuable.

By investing in their DTC business, these wineries are fashioning a proprietary marketplace. One they can come back to again and again, in good times and bad, in top vintages and uneven ones, with or without critical acclaim.

Terry wrote:
08.27.09 at 1:47 PM

Fred- While I agree that focusing on DTC avenues and technology driven approach while maintaining the aspirational nature of these luxury wines is the key to weathering this economic storm, I disagree that wine brands are "just a label".

A successful wine brand communicates its story and maintains relevance with its customers, treading the fine line between expanding a customer base and maintaining a position of rarity. Wholesalers who destroy a super premium brand in favor of selling more Jose Cuervo are doing us all a disservice. The short term may result in heavily discounted premium wines but in the long term we may see a decline in quality as vintners go the inglenook route and attempt to cater to a broader, less discerning customer base.

Ironically the luxury brands that are faring the best in this climate are the Kapcsandys and the Patz & Halls of Napa and Sonoma. Relatively new, and as a result more flexible in how they approach wine sales, but fiercely protective of the brands they are creating.

DTC is the way to go! I just hope once the economic situation improves the wineries don't return to their wholesaler overlords. (Like and abused wife to her alcoholic spouse)

Now if someone could just get direct to trade to work!

Mark wrote:
08.29.09 at 6:23 PM

The absurdity of the price levels at the upper range of the wine industry has got to become apparent sometime.

I've lived in Sonoma County nearly all my life--I've been marinating, basically, in the culture of wine for my whole adulthood. And I am more convinced than ever that there is no such thing as a bottle of wine that is really worth more than about $25.

Wine is a transient, ephemeral pleasure: drink it, and it's gone. I'd say that more than 1/3 of that pleasure is just the alcohol. It is utterly senseless to go crazy spending money on wines with 3-figure price tags. The differential in quality of experience between a $15 bottle of wine and a $100 bottle simply isn't worth the price differential.

Besides, there are really quite nice wines to be had now for less than $10 a bottle--sometimes quite a bit less.

But those with more than they know what to do with can generally be expected...well, not to know what to do with it.

Alder wrote:
08.30.09 at 11:37 AM

Mark,

Thanks for the comments. I'm sure your sentiments are shared by a lot of people, and at one point I, too, dismissed the idea of any wine being "worth" $50 or $100. Worth is a subjective interpretation -- everyone has to make their own judgement, but after tasting an awful lot of wines, priced from $2 to several thousand dollars a bottle, I must disagree and say that there are indeed wines that are worth $100 or more, no matter how ephemeral the pleasure of the six glasses worth of liquid they contain.

Note that I'm not saying that most wines that are actually priced at $100 are worth it. Quite the opposite, in my opinion, especially when it comes to California wine.

So I agree with your assessment of the level of absurdity that exists out there, but I've had many $100 bottles of wine that are indeed 4 times (maybe even 40 time) better than a bottle of $25 wine.

Anthony wrote:
08.31.09 at 4:35 AM

There is a glut of good to great wine in the world at precisely the wrong time - a global recession. As economies improve the story should start to become better again for the producers of fine wine - but it may take several years to get back where they were, and not everyone is going to make it. In the mean time discounting, creating new labels to avoid brand destruction, and other techniques will help producers survive. It is a plus for us consumers :)

Doug Danzer wrote:
08.31.09 at 5:44 PM

It is a great time to be a wine loving consumer. There are some great vintages('06-'07) Pinot/Cab/Blends that can be had and drunk or cellared for future enjoyment or profit(if the economy improves in the next few years).
That being said, it is a really hard time to be a producer. As mentioned commitments and contracts are made years before-projecting demand. The economic (crisis?) situation has made it critical that producers holding excess product act quick and with creative ideas. Even if, as suggested the winery protects their brand value and goes more DTC does not mean that the DC is there in those #'s --and I'm not taking about wine clubs w/waiting lists(which are a very small percentage).
So, if you are a consumer enjoy and seek out those producers you enjoy-buy some wine from them-and feel good about supporting them. If you are a producer I wish you luck and perseverance for some day the table may turn.

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