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02.06.2010

The Future of Luxury Wine

I spent the latter part of this week at the Vino2010 conference in New York. The largest Italian wine event held outside of Italy, the conference was a combination of major trade-show-style tastings, smaller focused tastings, and panel discussions. One of the panels I attended was entitled "The Future of Luxury Wine" and involved a good panel discussion on the outlook for wines priced over $30 in the next few years.

Moderated by Karen MacNeil, wine educator and author of The Wine Bible, America's best-selling wine book, the panel included the following speakers:

Barbara Insel, President and CEO of Stonebridge Research Group, and one of the most respected business advisors and researchers in the wine industry. Her company offers research services and reports on the underlying economics and trends in the wine industry.

Dan Berger, wine writer, judge, and speaker. Dan has had a long career in wine journalism, starting as a reporter for the Associated Press and later moving to the LA times. He now has his own private newsletter, Dan Berger's Vintage Experiences, and contributes to several publications.

Sergio Esposito is the founder and owner of Italian Wine Merchants, and for the past 20 years has been a consultant and broker for the Italian wine industry both here in the United States, as well as increasingly in emerging markets around the globe. He is also the author of a memoir entitled Passion on the Vine.

Joshua Wesson is an award winning sommelier and founder and owner of Best Cellars, an innovative wine retail concept on the East Coast focusing on wines under $15 organized by taste. In addition to continuing to manage the Best Cellars business, he consults on wine lists for organizations like Jet Blue Airlines and co-wrote the wine and food pairing book "Red Wine with Fish" along with David Rosengarten.

Each of the panelists was encouraged to speak for a period of time and then the floor was opened for questions from the audience and from the moderator.

Please note that I'd clearly flunk out of transcriptionist's school. I did my best to capture what was said, but have partially summarized everyone's remarks, especially Barbara's, who had a very data rich presentation which I could not possibly capture. I take full responsibility for any errors, and welcome any corrections if anyone in attendance wants to


BARBARA INSEL
Well, hello, everyone I'm here to depress you, but hopefully the rest of the panelists will cheer you up. First we're going to take a short run though on the state of the economy and then talk specifically about the wine industry.

Over the past 24 months, the real GDP (Gross Domestic Product) cratered, but in the past quarter has been headed back up. The last blip upwards represented about 2% growth in consumer spending which is pretty good, but somewhat less than encouraging when in the same period average wage income fell 1.3%. Over the last 16 months, the consumer savings rate rose to about 4.4% up from -1%. That's good but it clearly shows less good news and more just the lack of bad news. People have largely stopped spending money they don't have, but aren't spending a whole lot more. This belies predictions of a quick bounce back from the recession. Consumer sentiment is at 74.4% compared to its most recent peak at 96.9% in 2007.

We have a long way to go. Retail sales have stopped falling, but overall consumer behavior has changed. People are going out less. Traveling less. Reducing their overall number of shopping occasions. Which means people are avoiding going where they don't have to go, and one of the places they don't have to go is specialty wine retailers.

These days people are expecting discounts. Generally no one buys things that aren't on sale. Consumers are moving towards discount channels, as everyone realizes they are less wealthy than they were. Housing prices are 29% below their peak and asset values are 34.5% below their recent peak. People just have less money to spend.

So let's talk about what this means for luxury wine.

In short, the market fell off a cliff in November 2008 and stayed that way until April of 2009. For the first time in a decade we saw a complete halt to growth of all sales in the above $10 categories of wine. Over the past year there has only been sales growth in one segment of the wine industry and that is the $5 to $8 wine category. The third quarter of 2009 showed a tiny bit of growth in both the $10 to $15 segment and in the above $20 segment.

So the market is growing still, but the rate has slowed, from around 7% to about 2.3%. In particular, this results in what are called slower turn rates for wines in all channels. The average inventory turn (how long it takes a retailer, distributor, or restaurant to sell wine it has purchased) has historically been about three months. These days no one is seeing rates faster than about 6 months. This is resulting in the increasing rates of discounting, promotions, and inventory dumping that we're seeing in all channels and categories, but especially anything above $15. We're also seeing a massive discounting of imported wines in all channels.

One of the problems stems from the structure of the modern American wine industry. By best reckoning there are about 250,000 wines for sale in America. These wines are sold by producers to less than 700 distributors, which are then responsible for getting them to at least 431,150 places that sell wine. These outlets include approximately 143,864 off premise outlets (i.e. retailers), and 287,286 independent on premise outlets (e.g. restaurants, hotels, etc.).

These distributors are very a narrow, and shrinking, funnel that all wine must pass through. In the last 20 years the number of wholesalers/distributors has declined from roughly 7000 to 700 outlets. These remaining wholesalers are under intense pressure to stay profitable, and this results in primarily one thing: the reduction of inventory. Everyone is trying to unload slow moving inventory. Most wholesalers report dropping about 15% of their brands, and smaller wholesalers are going out of business because they can't move their stocks fast enough.

Shrinking distribution channel. Wholesalers declined from 7000 to 700 in the last 20 years. Wholesalers trying to reduce inventories. Dropping 15% of brands. Unloading slow moving inventory. Some smaller wholesalers may not survive. Even the fast moving brands having tough time getting to market.

One of the problems those of us who track the trends in the wine industry have is that the primary source of sales data, Neilsen, doesn't track what's happening in the off-premise space (i.e. retailers), and it only covers the lowest 20% of the pricing spectrum, so we don't really have industry-wide sales data on luxury wines.

What we do see in the data that we do have is the grocery channel shifting back to high volume, large group wines, and in particular the biggest domestic producers. Large volume brands are regaining market share for the first time in a decade. Private label wines are growing at a rate of about 20% and other data suggest that specialty retailers are only getting traffic if they discount 30% or more.

In restaurants, 2009 was the worst year on record for wine sales since 1972. We've seen a roughly 30% drop in wines over $30 and almost nothing is moving over $90 a bottle. As a result restaurants are cutting their lists and rearranging them. They are shifting their lists to focus more on the low end of the market and reducing the number of bottles they hold of each wine. The smartest ones are cutting their lists to only those wines that sell fast.

SERGIO ESPOSITO
I want to point out that most of our business is more in the super luxury category. We help collectors invest in wine that is on average $80 a bottle. So you can imagine what happened with that in the process of this recession.

We opened an office in Hong Kong last year in anticipation of the downturn. We're also dealing with Latin American countries as well. We're also in the process of opening a retail kiosk in Aspen to focus on collectors. We're also launching a fund that specializes in Italian wine.

In short, the work I'm doing is contrary to the market. We came up with this strategy because we felt that just like in the stock market the consumer had overconfidence in the wine market. The market for ultra luxury wine also became what I call "noisy." Quality was dropping. In short, there was a lot of inconsistent and low quality wine above $70.

Expecting that a recession might hit, I needed to decide whether I wanted to swim to the bottom of the pool or swim to the top. I took a chance and swam to the top, thinking that there would be more opportunity in a space where there was nothing but top quality wines. I bet that those wines that were truly high quality would still sell.

In 2009 our sales grew by 15%. Our average bottle sale went from $83 to $85. The bottle prices dropped, but we sold better bottles. As reserves of collections and libraries open, we buy. We are focusing on producers that can make quality products no matter what. That small segment of the population that are top end collectors haven't fallen off. People are not spending as easily, but they're looking for the right stuff. These people will need help finding the right stuff and that's where we come in.

By choice we have not done much to capture other segments of the market. There is a lot more cheaper Italian wine on the market, but we haven't tapped into it. For us the response to the recession is not about reinventing what we do, but perfecting it, and so far it's working. The reserves and allocations that we get from wineries have dramatically increased. What used to be just a few bottles became cases, and cases became pallets and containers. The result is that we can turn a lot more people on to the fun wines we like.


DAN BERGER
Mr. Berger offered an optimistic outlook that the luxury segment of the wine industry will come back eventually, but not necessarily at the highest prices. More importantly, he said, he believes there will be two key trends in evidence moving forward. The first he illustrated by describing an ad from a low priced wine producer that was clearly marketing itself as a luxury good. Increasingly, he thought, the savviest lower-priced brands and producers will try to appeal the the desire for luxury at a more affordable price. The second trend he described was a retreat to quality.


Firstly, I predict that by 2012 or 2014 that the luxury market will be back in full swing. But now it's farther to the bottom and farther from the top. A large number of people are trading down, and there are fewer people at the top.

A key question that needs to be considered is does high price equal luxury? My answer for this is yes and no. You have to decide whether there are layers of quality. There is real quality, there is faux quality and there is no quality.

It's worth looking at how the luxury brand business has been affected by Two Buck Chuck. Fred created a phenomenon that firmly impacted on the luxury market. Two Buck Chuck took people out of the jug wine segment into the fine wine segment. People all of a sudden wanted bottles of wine with corks in them. The luxury segment of the business started its growth at the same time. The downturn truncated this development but it will come back.

Luxury brand owners have discovered quite quickly that you must have visibility. Visibility is the most important thing. The fact that Roederer Champagne took out three consecutive full-page ads in the recent New York Times magazine, tells you something. Visibility is critical to the way that a brand gets treated. Visibility is worth its weight in gold.

As further proof, I'd like to point you to an ad that ran on the back cover of Decanter magazine's last issue. It was an entire full page ad for a luxury product called Frascati [Frascati is a relatively inexpensive white wine from the Italian region of the same name -- Alder] The ad was brilliant. It showed four young attractive people sitting around Trevi fountain in Rome drinking Frascati. It clearly demonstrated luxury. But why would this brand use luxury for that ad? To answer this question you have to look at who are the buyers of Decanter? In short, people with money in England that can afford to fly to Rome. This ad would be about raising the brand's image.

The second most important thing for luxury brands after visibility these days is social responsibility. This is the second major change in the market. For the first time luxury is being aligned with social responsibility (everything from charity events, to environmentalism, to packaging innovations).

In terms of pricing, discounting on a luxury band erodes the image. It cannot be done and maintain its luxury status. What's real about luxury is the volume available. Scarcity and exclusivity are real world issues. Will we see people creating artificial shortages to improve luxury brands?

What else is there to do? Should some brands align with other luxury brands? There is a very real drawback to this. A wine ad with a Rolls Royce in the background? People will assume they cannot afford you.

The real problem is that we don't yet know how to track the luxury wine industry as Barbara said. Until they've got chips on every bottle that get sold, we can only analyze the bottom 30% of the industry.

What I deal with as a writer is the fantasy world -- the trouble is translating this down to the real world. The luxury market is going to come back and we have a lot to look forward to.


JOSH WESSON
in many ways I'm the least capable of answering this question of what to do with luxury wine. I'm a cheap date, splashing around the shallow end of the pool, as Sergio describes. I've created a store where wines were priced less than $15 and organized by taste. I've waited 20 years for this recession and now I can tell you all the truth: I created it.

The impact of the economic downturn didn't have a binary effect on how people consume wine. Demand for wine did not abate. Last year we saw about 5% increase on sales and a significant increase in margin. Something really exciting is coming out of this recession, which I describe as the creation of a real expression of quality for wine drinkers. Quality is subjective. If you need any more proof of that all you need to do is take a look at a $15, a $50, and a $150 dollar bottles that all got 90 points.

I want to tell you about something I've been doing with more than a hundred people for the last 8 years. I call it the "is the price right" blind tasting. I take eight wines that range in price: one costs about $10, one costs $20, the next one $30 and so on up to about $150. They are all made from different grape varieties and come from different places so there's no trickiness to this tasting where people are comparing the same kinds of wines. The question that I ask is simple: I ask people to put them in order of price. The best score in eight years was one person who got about half of them right. The average score was one out of eight.

Once you break the implied connection that price equals quality you create a very powerful force with consumers. Quality in terms of the pleasure received will always win. This all boils down to what I see as a new reality in the wine world: reality is the new reality. I predict that we are going to revert to pleasure and quality based on what wine does for us, not based on what someone else tells us is good. This is why Sergio can have the kind of year that he did. He sold wines that delivered or over-delivered on their promises.

Now there's something very real that's happened to our spending. I disagree with Dan about return of the luxury market. I believe the wealth that was created in the last decade will never return. We are now going to be forced to look at luxury items and discretionary spending in a totally different way. We're going to demand that the things we buy pay back the value we invested in them.

We're going to be given this incredible light that will shine on our palates and our lives. We're going to start drinking and buying things that are quality.

Last year I created a Best-Cellars-meets-Costco concept store. Think of it as a warehouse version of Best Cellars in New Jersey. We sell wines from $5 to $25 and it's exploding. I firmly believe that as long as you can meet or exceed people's expectations you will win, and people are willing to pay for it.

Have you noticed what's going on in really good restaurants here in New York? They're full. Why? Because people will pay money for experiences that over-deliver. This recession is going to do one thing really well. It will weed out the junky luxury experiences and get us back to the real ones that give back. I'm bullish on the wine business. I'm expanding my store base, but not expanding my selection. I'm going to be very careful about the wines that I pick. I'm going to be choosing wines that over-deliver.

KAREN MACNEIL
Before we take questions. I'd like to offer an idea here. I was listening to Josh talk about products that over-deliver. Something that is hard to quantify is what wine delivers psychologically. Luxury wines give us something. But a luxury brand is not established overnight. A true luxury wine is not the same thing as a high priced wine. Takes a long time of aggregated appreciation for something to turn it into a luxury. Once something is established as a luxury, as opposed to something that costs a lot, it's a lot more powerful. It's difficult for people to let go of the things that they consider true luxuries in their lives. There are a lot of high priced wines, but wines that didn't establish themselves as luxuries are doing poorly. True luxuries are doing well. I think there is a big division between a luxury product and high price.

Chuck Wagner at Caymus took this bull by the horns recently when he lowered the price of Caymus Special Selection.

Posted by: Alder on February 6, 2010 8:03 PM

   

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Comments (14)

Susan Guerra wrote:
02.07.10 at 5:45 AM

Alder--Thanks for this great coverage of the event, especially Barbara's portion which my hand written notes could not capture fast enough. It was also great to meet you and share a glass or two.--Sue

02.07.10 at 2:33 PM

Wow, now I wish I had attended! This is a great synopsis of the current state of the luxury wine market, but what I found even more fascinating is the different perspectives of each panelist. I've met Josh Wesson, and I've read books/articles by Dan and Sergio (and of course Karen!) and each in their own way represents a different aspect of wine - sort of "personal terroir". Josh always catches attention with his counter-intuitive ways, I mean he started Best Cellars, which has gone a long way to make wine more approachable, especially to the 20 and 30 something demographic. Even though he and Sergio sort of disagreed, I think they're talking about two different audiences: those who are wealthy and can afford the best (and tend to be over 40) and those who are younger but upwardly mobile. This latter group are more into "experiences" and not yet as wine brand oriented. It will be interesting to see how luxury wine brands adjust their marketing to this newer wealth and attitude.

02.07.10 at 2:34 PM

Nice report from Barbara Insel, and the comments of Sergio Esposito are very instructive as well.

Overpriced brands that underproduce always have hard times when the markets turn down, but high quality producers who have earned their standing and their customers' loyalty by long-term commitments to high quality for high price have typiclly had less difficulty.

Chuck Wagner (not Charlie Wagner who is Chuck's father and passed away some years ago) is not the only winery owner to lower prices. He was one of the first to raise prices when the market ratcheted up, and it is not surprising to see him sensitive to the times and use price movements to help keep market share. He does make a lot of very expensive Cabernet Sauvignon, and the Special Selection is now priced at $130--not exactly a price at which money will be lost.

Lisa Mattson wrote:
02.08.10 at 8:56 AM

Alder -- thanks for summarizing this panel discussion. I'd hoped to attend the conference but had to decline due to our vlog launch. I'm really glad to see Dan pointed out the importance of social responsibility with luxury brands. Regarding analysis of market trends, when do you think the true premium and ultra-premium categories will actually get some tracking mechanisms in place for our business? I've only heard of the wine consortium by a group out of Vermont thus far, which gets higher-end wineries to share their marketing data with each other in one database.

02.08.10 at 10:59 AM

Thanks for making the effort to share the information from this presentation.

Steve Raye in the one of the other sessions did have data on higher end wine sales - his slides are available at http://www.slideshare.net/Steveraye/vino-2010-marketing-wine-to-millennials-steve-raye

Also, curious to know if SERGIO ESPOSITO's Aspen kiosk will be an offline location taking orders for global sales? It would be a very cool mix of offline & online marketing / selling.

Ed King wrote:
02.08.10 at 2:49 PM

Great discussion- based on the variety of perspectives. I have to agree with the "new reality" concept- that the best business plan is to over-deliver. And then over-deliver. Shocking idea- but it is not about we who make wine- it is about those who buy our wine- are we doing for them what they want wine to do- at a price they like?

02.08.10 at 4:50 PM

Alder, amazingly thorough report. How do you do it?

One small correction...InfoScan data is the bottom 30% of the market, not 20%. Chain grocery and drug, large liquor outlets, usually chain, esp in states (e.g. NY, Mass.) where can't sell wine in grocery/drug channel. No Costco. And no on-premise although they get some directional info. Makes life interesting.

Karen MacNeil wrote:
02.09.10 at 9:55 AM

Alder: who knew that added to the long list of your accomplishments was the fact that you could type a million words a second while balancing a laptop and (usually) a glass a wine at the same time....
This is a terrific summary. Thank you so much for very accurately reporting one of the most important issues of our time. Consumer purchasing behavior is in a great state of flux, and that is a concern for all segments of the market.
Gratefully, Karen MacNeil

Sara Cummings wrote:
02.09.10 at 1:18 PM

Alder: Thanks so much for taking the time to capture and share this. Interesting perspectives from a well-selected panel and certainly plenty to chew on in terms of exactly what does and does not define a luxury product.

02.10.10 at 4:28 PM

Alder, this is incredible. Thank you so much for taking the time to transcribe this session. I'm fascinated with consumer wine purchasing in the under $25 range and this was super helpful for me.

Best,
Jess

Ronn Wiegand wrote:
02.11.10 at 7:03 PM

Alder,

Terrific transcribing of the seminar!
Really a fine job, and wonderful to read. We owe you one (more) for your efforts and dedication.

Best,

Ronn

Maria wrote:
02.15.10 at 8:51 AM

Thank you, this is an excellent article.

I think that there will always be a market for high end wines, but that market has certainly shrunk. Consumers have discovered that there are very good wines out there at reasonable prices. The quest no longer involves finding the greatest bottle of wine; it now involves finding the best value.

Will wine lovers go back to spending freely on a bottle of wine? Nothing lasts forever, and bad economic times will end some day, but the realization that you can enjoy wonderful wine at a reasonable price will not soon be forgotten.

Maria wrote:
02.15.10 at 8:55 AM

Thank you, this is an excellent article.

I think that there will always be a market for high end wines, but that market has certainly shrunk. Consumers have discovered that there are very good wines out there at reasonable prices. The quest no longer involves finding the greatest bottle of wine; it now involves finding the best value.

Will wine lovers go back to spending freely on a bottle of wine? Nothing lasts forever, and bad economic times will end some day, but the realization that you can enjoy wonderful wine at a reasonable price will not soon be forgotten.

Jack Smith wrote:
06.11.10 at 4:31 AM

I'd like to offer an idea here. I was listening to Josh talk about products that over-deliver. Something that is hard to quantify is what wine delivers psychologically. Luxury wines give us something. But a luxury brand is not established overnight. A true luxury wine is not the same thing as a high priced wine. Takes a long time of aggregated appreciation for something to turn it into a luxury. Once something is established as a luxury, as opposed to something that costs a lot, it's a lot more powerful. It's difficult for people to let go of the things that they consider true luxuries in their lives. There are a lot of high priced wines, but wines that didn't establish themselves as luxuries are doing poorly. True luxuries are doing well. I think there is a big division between a luxury product and high price.

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