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04.15.2010

The Coming Carnage in the California Wine Industry

"The shitstorm is just beginning," he says, with a gravitas that makes it sound like the end of the world for the California wine industry. And while it may be the end of an era, rather than the end of the industry as we know it, my conversations with the man that I will refer to as Deep Tank leave me with a hollow feeling in the pit of my stomach.

I wanted to get to the heart of what is really going on in the California wine industry as a result of our great recession, so I found the most connected person I could. A guy who's walked through more wineries and talked with more winemakers than anyone else I could think of. Deep Tank has his finger on the pulse of what's going on in nearly every major wine region of California, and that pulse, he says, is faltering.

"It's a huge game of chicken out there -- between the wineries, the distributors, the retailers, and the lot of other people who have a vested interest -- and it's really ugly," he says. "Right now, no one wants to be the first person to buy a wine, only to find that two months later, it's selling for 30% less. But wineries desperately need to sell, and if they don't they're screwed."

I spent several hours talking with Deep Tank, trying to unpack just exactly why so many people were, as he put it "so fundamentally screwed" and was surprised at how quickly the conversation ceased to be about wine, and how quickly it became about fundamental business finance and economics.

We all tend to forget (those of us who knew in the first place) that wine is a business, and like any business it has to operate within key principles of accounting and economics. The idea of a winery being run by balance sheet rather than by passion and philosophy doesn't make for very good marketing, but at the end of the day, if a winery isn't run like a business, and a good one, it will fail.

And that's just what Deep Tank says is going to happen to literally hundreds of wine labels in California in the next 18 months. "There are a ton of these little custom crush wine labels that are literally going to vaporize."

The explanation for this grim fact lies in understanding the fundamental economics of owning and running a wine label, even one that includes no vineyards, no winery buildings, and no full time employees.

You may have heard that wine is a capital intensive business? This means that you have to put a ton of money in before you get much of anything out. Leaving aside for the moment all the suitcases of money required to buy land, build a winery, plant vineyards and everything associated with being a real physical winery, the costs of making wine without any of that stuff is still pretty steep. You need to buy barrels (new French oak runs somewhere between $800 and $1100 per barrel depending on the exchange rate and type of barrel). You need to buy grapes (if you want to make really good wine, that's somewhere between $4000 and $8000 per ton). You need to rent space in a custom crush winery. You need to buy bottles, and labels, and boxes, and that's all before you sell a single bottle of wine. To make matters worse, you have to age wine for some time before you sell it, so not only do you have to buy all those things, you have to buy them all for probably two to three years in a row before you sell a single bottle of red wine. Ever wonder why so many wineries in California sell Sauvignon Blanc? Because it goes from grape to $$ in about 6 months, instead of 28 months for a fine Cabernet.

But back to the point. You need boatloads of cash to start and operate a winery, and even if you've got a lot of money to start, most people finance the operation. Which is to say, they go to a bank and take out a loan.

When the bank lends a winery money, it's a relatively risky bet, especially for a small operation. As anyone knows who has taken out a loan or a line of credit before, the bank wants to protect itself in the event of the borrower not being able to pay back the loan. So they ask for security in the form of collateral. This means they need something that they can seize if for some reason you don't pay back the loan. When you get a mortgage or a home equity line, that thing the bank will take is your house. When you get a loan to start or run a winery, the collateral you put up to securitize your loan is your wine.

And that is why, says Deep Tank, "you're about to see a shitstorm of epic proportions."

"Let me play it out for you," he says.

"You've got maybe hundreds of these little virtual wine labels running out of custom crush outfits. They've got two or three vintages in really expensive oak (and another vintage sitting around in case boxes) where they've paid $6000 a ton for some fancy big name Pinot fruit, a bunch of really expensive corks and heavy glass bottles, and a couple of years ago they would have been looking forward to selling 4000 cases of their tricked up wines for $60 a bottle, no problem. That's the financial picture they took to the bank in 2008 to get another loan to buy barrels and more fruit. But now, their wine isn't worth shit. They'll be lucky to sell it at all, let alone for a discount. From a balance sheet perspective, there's a single word that describes this situation: fucked."

What used to be hundreds of thousands of dollars of inventory assets that the bank could sleep easy over, knowing they could swoop in at any time, scoop up the wine and sell it on the market, is now a near worthless pile of wood, wine, cardboard, and glass bottles.

Of course, banks don't value these assets at anywhere near their full retail value (they use a set of bulk wine pricing guides that are closely held secrets by big wine brokerage houses like Ciatti), but that doesn't matter. The value of these assets is solely dependent upon being able to sell them, and these days, almost no one is buying.

"What you're looking at," says Deep Tank, "is a foreclosure mess just like this housing debacle we just went through. Banks will not be renewing lines of credit, they'll be pulling them, and all these little wineries won't be able to buy fruit, they won't be able to buy barrels, they can't honor the contracts they've made to buy grapes at outrageous prices, and even worse, they'll be lucky to sell the wine they've already made for half price. They won't be able to finance their debt and they'll default on their loans. They're just going to vaporize."

According to Deep Tank, the handful of impending winery foreclosures already announced in a recent San Francisco Chronicle article are just the beginning.

The scary thing about that Chronicle article is that the wineries referenced there have way more going for them than the average little virtual label. They have land and buildings, assets that have much more inherent value than wine in barrel. But even those assets have taken a huge beating in terms of value, and they are not enough to satisfy banks that have suddenly gotten extremely risk averse.

It's at this point that Deep Tank introduces me to another character in the calamity. His name is Workout Winemaker.

"These guys' phones are ringing off the hook," says Deep Tank. "Any winery in financial distress is a ticking time bomb for the bank. These workout winemakers work for the bank. Their job is to come in and look at all the assets and contracts going forward and figure out whether the entity is viable, or whether it's toast. They reassess the bank's valuation of the asset, and they either find some way to better collateralize the loan, or they take over the inventory."

"Yep," says Workout Winemaker, "I'm kind of like that guy The Wolf in Pulp Fiction, except instead of dead bodies, it's dying wineries."

I knew Workout Winemaker long before I was introduced to him again by Deep Tank. He's a well known winemaker for a solid, very profitable mid-range winery in Napa who also happens to have gone to business school.

"What I'm most surprised at," he says, "is just how many banks aren't freaking out as bad as they should be. A number of them don't seem to want to admit just how bad the situation is. These banks have been giving away money according to a stupid mathematical formula about how much your wine should theoretically be worth but those numbers have no basis in today's reality. Eventually the banks are going to realize, 'Holy Christ, what have we done. We've been putting money into the shittiest industry possible for the last 10 years.'"

But for those banks that do understand the mess already, Workout Winemaker is out trying to make bad situations a little less painful. He walks into a winery and ignores the beautiful barrels. He doesn't stop to taste the wine. He walks into the back office and looks at the balance sheet, the contracts, the inventory of goods, and the current (dismal) pricing for wine on the bulk market, and then pronounces his verdict.

I ask him what his most recent verdict was, and he pauses before saying, "I'm not sure you should quote me on this, but I told them they were fucked."

"So how bad is it out there?" I ask.

"Nobody really wants to know," says Workout Winemaker. "Let me tell you the scariest thing I have seen in a long time. A few weeks ago I was walking through one of California's largest wine warehouses, and it was unbelievable what a shitpile of wine is sitting in there. I'm talking big name wineries with unbelievably huge levels of stock. I looked closer and it's 06's, 05's, and rows and rows, pallets and pallets of this stuff. Wines priced anywhere from thirty to a hundred dollars, mostly Napa but a lot of Sonoma too. Hundreds and hundreds of thousands of cases. And I'm thinking to myself, 'God, this is not good.' People are waiting for some big day to come when they'll be able to sell this wine, and it's just not going to come. It's never going to come. And I'll tell you another thing. There's no way Wine 'Til Sold Out or any of those other places could possibly sell all this stuff. It was that much wine."

It sounds like a very bad time to be the accountant at a winery, or worse, a winery without an accountant.

"Tell me about it," says Workout Winemaker. "There's not nearly a high enough level of skill in this industry when it comes to the basic finances of the business for people to survive. Mix a lifestyle business with a downturn and all you get is a big fucked up soup. The sharks are circling and just waiting as the deals get better and better. It's gonna be a bloodbath and we're all just waiting for it. All of these small wineries are going to be destroyed, and the mid-tier wineries that are highly leveraged too. And roughly 80% of them are highly leveraged."

Both Deep Tank and Workout Winemaker are in the guts of the turmoil caused by the downturn. They may even stand to profit from it, especially Workout Winemaker, so their predictions of the sky is falling have to be understood in that context. Having said that, I trust both of their judgements, as do many in the wine industry. I've been trying to figure out what they might have to gain by selling the situation to me as worse than it actually is, and I can't really come up with anything.

But as I reflect on our conversations, the most sobering thought I am left with remains that even if these guys are half right, the California wine industry is in for some seriously troubled times in the next couple of years.

If there is a silver lining to any of this, it might be that there will be a lot of very good wine available for incredible prices. So if by chance you haven't been hurt as badly by the recession, or if your personal recovery leads the wine industry's recovery, you'll have an opportunity to stock your cellar at rock bottom prices, as dozens of sites like Cinderella Wine and Wines 'Til Sold Out that Deep Tank calls "dumping grounds" pop up like Spring crocuses.

Bad time to be a winery, good time to be a bargain hunter.

Comments (48)

Nancy wrote:
04.16.10 at 5:48 AM

Thanks for this. I wonder, could a lot of the expense (and debt) that wineries took on in recent years also have resulted from the push to "go green"?

Mark wrote:
04.16.10 at 6:58 AM

It's a tough situation to be sure. One thing, since getting into the business that has surprised me is how thin the margins are for the wineries because of the prices being paid by the distributors and others (yes, like myself). I think there is a going to be a growing segment of the industry focused simply on helping wineries survive.

1WineDude wrote:
04.16.10 at 7:06 AM

Sounds like the culmination of many, many sidebar conversations that I took part in when last in Napa for the Wine Writers Symposium. :-)

Jenny D wrote:
04.16.10 at 8:52 AM

I don't think this has anything to do with the "push to go Green", rather; as Alder implies, it's a simple matter of economics. Unlike many other industries, the wine industry is ripe with amateurs who do not understand the basic principles of finance along with supply and demand. "Mix a lifestyle business with a downturn" states it perfectly. A lifestyle business, or ego project that looks at bottle cost as a representation of one's self rather than a response to what the market wants will never survive in the long run. Frankly, I think this shake out is a good thing. It's time to separate the chaff from the wheat, the strong wineries will survive in the end.

04.16.10 at 9:18 AM

Great research, Alder, and better than a simple listing of today's problem children.

As you say, even if the predictions are only half right, the coming impacts will be significant.

I have a couple of anecdotal sidebars to the extensive commentary you have given us.

A few weeks ago, I was up in Napa and spent time with a well-financed, mid-sized, professionally run winery whose vintage releases have not yet started to back up but is feeling the pressure nonetheless because of its price niche (a lot of Cab near and into three digits).

Their leaders indicated that there were about sixty wineries for sale in Napa, although not all of them actively for sale, and that about half of the number were in some sort of financial duress while the other half were simply places for which the ownership was ready to move on, especially if their children did not want in. This latter group was described as the "you don't hear about them but they will turn over in the next five years" category.

I was told by an up-scale wine merchant that his store's sales in March were way up (46% year over year) and that he is slowly adding inventory at this point, but that April has had a slow start. Whether the turnaround comes soon enough and is deep enough to save the marginal players is still anybody's guess. But, however it plays out, your comment that there will be bargains to be had is wholly convincing.

One other anecdote. A winemaker who tastes with the CGCW panel told me the other day that the Napa Cab he bought last year just before harvest at $1500 has gone back to $3500 per ton, still short of the $4500 at its peak a few years ago.

And bravo for pointing out that wineries are businesses. I think we sometimes forget that the laws of supply and demand apply to wine as well, that cash flow is cash flow and that debt has to be repaid.

Cyril Penn wrote:
04.16.10 at 9:51 AM

I was speaking with an investment banker recently and asked him why there hadn't been more bankruptcies in the wine industry of late. He said it's because the banks are incompetent and to expect to see more Bks when the economy improves - he said when money is available for making deals, the banks will be emboldened to push the wineries over the edge. Nice piece by the way, and I like your use of "deep tank" - In that past I've worked with "deep bottle."

Jason wrote:
04.16.10 at 10:15 AM

Okay, as someone in the industry for a while, I can verify that some of this is accurate, but let's separate the issues here:

California has about 6,000 labels, most created in the last 5 years. If a "few hundred" poorly thought-out virtual wines go away, big deal - the industry will go on and be stronger without them.

Yes, most wineries are struggling and discounting is rampant, but let's not assume the sky is falling just from that. Demand and supply will come back into balance and prices will rise again, so buy up now.

As for the Chron's article about foreclosures, that was mostly hyperbole. There will be a few poorly capitalized guys who will go under, but they were on their way out anyway (and really, will the wine world really miss EOS??)

The wine industry has survived for many years with a low-level of business professionalism (most small wineries do not make an annual plan and many do not really know what it costs to make a case of their wine), and this latest bump in the road will force many of them to run their wineries like a business, not really such a bad thing.

Paul Gregutt wrote:
04.16.10 at 10:19 AM

A couple of quick anecdotes from WA - Garagiste is selling the 2006 Beringer Private Reserve (a very fine wine) for half the 'list' price. A Walla Walla boutique (Isenhower) just announced they are firing their distributors, cutting production to 2000 cases, and going to all direct sales. It's not all bad either - they eliminate most travel (a huge expense) and don't give away most of their profits to the middlemen. And they get lifestyle benefits also - in the form of time with family, one-on-one with actual customers, and less stress overall.

Greg wrote:
04.16.10 at 10:26 AM

Great article, lots of good info in here. The reality is these luxury brands were just one degree of separation away from the bubble-makers selling adjustable rate mortgages and hedge funds based on insane derivatives. Kind of like buying a flat screen at a price that's too good to be true, you can't be surprised when it turns out you're in possession of stolen goods. The folks who wrecked the economy from the top were most certainly the conspicuous consumers buying the overpriced juice. It will be fitting that wineries built on this dirty money fall as well.

It's unfortunate that some small timers were sucked in trying to start their own brands. But it's simply a bad business decision to go into making Napa wine where all costs are horrifically inflated if you can't afford to own any equipment or land. They were chasing prestige instead of seeking unique terroir, pure and simple.

I'll be waiting for the oceans of discounted wines to come my way, but will continue to support by buying at full price those wineries that did things the right way building from the ground up.

04.16.10 at 10:54 AM

I'm glad we closed our doors when we did. I think the next couple of years are going to be very tough for small producers. Now I just have to worry about selling grapes, rather than grapes AND wine!

Great job Alder?

04.16.10 at 11:30 AM

Great piece, Alder. 2006-2008 was just as much a bubble for wine as for real estate and too many people spent most of this year in denial. So many examples. I am not sure that it is better to be selling grapes than wine tho -- think the impact has hit many growers already. We are just such a producer focused industry, too many people forgot to look out at the rest of the world.

04.16.10 at 11:51 AM

Great article that really does reflect the ocean of unsold wine in the market. The other source of oversupply which will continue to pressure brands in distribution channels is the vast supply of cheap, cheap, cheap wine flooding in from Europe (and probably S. America later this year). Importers are bringing in very solid wines for $2-3/bottle.

2010 and 2011 prices will provide a bonanza for consumers. In the long run, this is great, as people will start drinking more wine. In the mean time, small brands need to innovate and keep focussing on the direct sales.

04.16.10 at 1:45 PM

Blame Parker, Wine Enthusiast, Spectator, et. al. Wine is food and should be priced accordingly. It is about time these pseudo wineries go under. Even real wineries, like ours, are not worth much money. We will survive because we don't make wine for a bank.

Buzz wrote:
04.16.10 at 1:58 PM

One thing we all need to keep in mind is that this was one of the worst economic downturns in history and that many businesses, weak and strong, have suffered far more than anyone ever expected. To blame wineries' troubles entirely on unsophisticated business acumen isn't fair. The best thing consumers can do is support their favorite wineries by paying full price instead of waiting for severe discounting and potential disaster. Everyone loves a discount but I'd rather spend a few extra bucks and see more small producers prosper than be left with a world dominated by deep pocketed large producers selling wine at less than $20 a bottle.

Jonny Deeper wrote:
04.16.10 at 3:17 PM

Deep Tank sounds too much like Ed Barr.
Wanna-be thinks he knows the biz...
But just regurgitates downer gossip...
Ed is a chick like that!

04.16.10 at 4:44 PM

Enjoyed the article. Interesting and stimulating. Still waiting to see the real heavy hitters to go on sale. Doubt that will happen though.

brian wrote:
04.16.10 at 5:10 PM

fascinating article. we are 22 months new, 1 hour west of WDC. We opened with 2900 cases, this fall we'll produce 10,200. Expect to sell 6200 cases this calendar year. We're in the black this month. We sell everything at the winery. Opened with bottle prices between $18 and $26. Now prices are $24 to $33 a bottle. Business keeps increasing. Did $16k both Sat and Sun last week. Point of all this is that VA allows on site consumption. We welcome everyone including their kids and dogs and people just come and hang out. I buy more and more picnic tables and keep adding outside tasting areas. We focus on great wine, great service, great location, great views, great fun. We'll gross $2M this year. It's a different model but it works. Retool. Rethink. Reconnect.

wine-insider wrote:
04.16.10 at 6:24 PM

You may very well be correct, but the enormous private label business is growing like wildfire,and operations similar Trader Joe's (they sold 5 million cases of wine last year) who are multiplying. The next cycle we'll all witness is severe attrition. It will drastically effect every individual within our overgrown industry.

Buzz wrote:
04.16.10 at 8:07 PM

As a counter opinion to anyone who thinks there are warehouses full of past vintages waiting to flood the market...a quote from the SF Business Times today about the California wine industry "... Q4 shipments from many of the region's and state's largest wine warehouses were up 20-30% or more over 2008..."

Randy wrote:
04.17.10 at 7:33 AM

Although our operation isn't like "Brian's" situation above with huge production increases and impressive sales, wineries working the DTC channel with some diligence will be successful. Yeah you're f'ed if you...

rely on silly scores to sell your wine.

rely on distributors to represent your product in the market place... remember you should be able to market your wines BETTER than anyone else. If you can't, ya might want to rethink this bus.

are producing more wine you can sell.

or if you're prices are at the greedy level of $32 or more. There's barely a reason to get above this price point and certainly, the consumers know this... do you?

D T C is the only future for small producers.

russ bridenbaugh wrote:
04.17.10 at 11:54 AM

How true it all is. I spend most of my time now looking for bargains and they're all over the place. Penfolds'vineyard designated shiraz/Cab for $6.49? Yes. It's clearly a buyers market.

04.17.10 at 12:20 PM

Enlightening post. You have also described George Soros’s “Theory of Reflexivity”. During the credit expansion phase (last two decades), collateral (wine) prices go up, and wineries and venture capitalists increase their borrowing capacity; establishing a “reflexive connection” between collateral prices and loans (Soros describes this process as the connection between the real economy and the financial markets). They invest and increase production supported by a continuous credit expansion. Then comes a time when prices fail to go up even with money and credit still expanding. At this point (wine) market participants perceptions assume a negative bias, and collateral prices start to fall. This is when credit begins to contract, for collateral prices are not sufficient to roll over existing debt. Which in turn force borrowers to sell inventories, pushing prices even further down and almost suppressing their capacity to borrow. The crisis is established.
The process described above, which is identical to every bubble observed in the last decade, can also be described as a classical sequence of boom and bust, and was first analyzed by economist David Ricardo (1772-1823). Also a well known speculator, Ricardo observed that these regular and recurrent sequences of booms and busts started to occur in England, in the middle of the XVIII century, a few decades after the world’s first central bank was created: the Bank of England.

John Kelly wrote:
04.17.10 at 1:29 PM

Alder - No question this is the toughest market I have seen in nearly three decades associated with the industry. Things really are pretty much doom and gloom for custom crush vanity brands - custom crush is the least efficient use of capital in production and as you note you have no collateral other than your wine.

Things are a little better if your borrowing is secured with real property - especially vineyard, since the received wisdom is that grape demand will outstrip supply in the next 3-5 years. Bankers with loans secured by vineyard can afford to take a longer view.

Randy - where did you pull that $32 number out of? Sounds like Fred "no wine should sell for over $10" Franzia. Cost of goods on high quality wine can be over half that if the producer owns the vineyard. At $32 retail, by the time you have covered overhead and dealt out the discounts necessary to move wine, you are losing money on every bottle sold, unless your model is close to 100% DTC. The economics are worse for custom crush using expensive purchased fruit.

Kate Somple wrote:
04.17.10 at 2:39 PM

Compelling article, though I tend to question the agenda of any source who may stand to profit as consultants to panicked wine label and winery real estate owners, myself included. I've been quietly and confidentially selling wine related real estate assets in Napa and Sonoma for the past 10 years. The impetus for selling wineries today has not changed in the past decade, which include no cash flow, indebtedness, lack of financial planning and burn out. I have witnessed a predictable 5 part cycle that causes the turnover of a large percentage of wineries. Level I- Romanticism, egotism and enthusiasm turns to: Level II- cash flow choke; inventory build up and denial turns to: Level III- backdoor discounting, increased debt and a worrisome willingness to sell for a unrealistic price turns to: Level IV- pressure from investors, pressure from lenders, wholesale level build up of wine inventory turns to: Part V- Oh shit, we need to stop the bleeding. Sell it or lose it.
The sad and very avoidable part of this cycle, which coincidentally is when I get called in, is Level IV, lasting two to three years typically. There is no going back to a Level III value of your winery, which was the last chance to get a realistic price. When you wait until you're bleeding into the water, even docile buyers turn to sharks.

The sources in Alder's blog refer to the quantity of winery and wine brand owners who are in Levels III-V, which is an 8 to 10 year cycle for most. The blog's sources ponder why lenders aren't freaking out more, but this is not a new experience for them. Wine inventory devaluation, and calling in notes based on a shrinking security something lenders did during the end of the last 10 year cycle, which was wisely noted by the comment posted above on the theory of reflexivity.

I'm not a big fan of anonymous sources predicting doom, but i get why they chose not to reveal their identities. Here are three things I know to be fact, and put my name to: #1. Record number winery (real estate) owners have entered into Level III and beyond in the winery ownership cycle. Compromised winery owners wait to act on imminent outcomes because they're afraid. They're afraid distribution channels will hear about a possible sale; they're afraid key employees will find out and leave; they're afraid their lender will find out and call in their chips; they're afraid to face the fact that their real estate and business assets will sell for 1/2 of what they want or need in order to get out of trouble.Selling your blood/sweat/tears/ego winery that you birthed is like giving a grown child up for adoption. Fact #2: Opportunistic buyers (and that's the only kind who close escrow by the way)are fierce negotiators but they are not to be blamed whatsoever for the predicaments winery owners find themselves in, partly due to the lack of reasonable alternatives, and partly due to the nature of denial in a business of image and egos. Fact #3. The process of selling and buying wineries is broken, adding further difficulty to an already difficult situation. I have put forth great effort to provide a safe harbor for real winery sellers and real winery buyers to discuss and negotiate winery transactions, but surprisingly only a small percentage of sellers will even cross a confidential threshold. There is so much denial and masque wearing and fear of exposure that sellers don't know whom to trust or where and when to turn! It's a tough situation for everyone. Always has been.

Randy wrote:
04.17.10 at 4:33 PM

John,

Based on my own small winery operation with little to no economy of scale discounts, good margins are made at $32 bucks. Whether one distributes and sells it for $16 or does most or all of the work and keeps it for themselves, there's few reasons to get above that release price. Wine Consumers are aware of this price point as the breaking point, why don't you? In my winery, we do go 99% DTC so I'm int he TR daily sluggin it out with my clients and future clients and they don't want to pay more than $30 for a bottle of wine now. Now is different that two years ago and certainly different that 5-7 years ago. What's the Dylan song... "These's times, they are a changin'" Times have indeed changed and the old $42-105 price point is now $18-30. At least with the majority of folk.

$32 per btl sounds arbitrary but I'm seeing it daily. Moreover, those who pushed their prices into the strta level maybe made bad business (or greedy) decisions and are now getting their hands slapped.

Wineries that held their prices is the fair to moderate range are going to do fine. It's like the turtle and the hare scenero. Slower, incremental increases to production and price vs the fast, explosive pace of score whores.

John Kelly wrote:
04.17.10 at 10:25 PM

Randy - most of the wine we make is priced under $24, but a surprising amount of our Pinot is selling DTC at $45 - which is where we need to sell this particular wine to cover cost of goods plus overhead. It is tough that that price point is dead in distribution, but it is what it is.

I'm happy for you that you can make good margins at $32 selling your own wine mostly DTC, but to suggest that any price above $32 is "greedy" is just self-serving.

Mychal Greenwood wrote:
04.18.10 at 4:10 PM

Kudos to everyone for FINALLY providing an honest assessment of the current situation. It feels like we have been the only blogs providing this level of harsh reality, in combination with a potential valid solution (that has been previously implemented with great success), for the longest time.

It will be intriguing to see if the “locals” in the Wine Country will admit that outside help is necessary to “pull out” of this crisis.

Stephen Weinberg wrote:
04.19.10 at 7:44 AM

Now if we could only get Restaurant Owner to realistically price these great value wines we might see an increase in wine sales and restaurant net profit!!!

EVO wrote:
04.19.10 at 7:53 AM

Up and down the aisle of my local state store here in PA, I was stunned at some of the bargains stacked everywhere. I started snapping up bottles like a kid in a candy store. Bargains like I have not seen here since Jonathan Newman resigned his Chairmanship of the PLCB.

EVO

Alder Yarrow wrote:
04.19.10 at 8:31 AM

Eric,

Thanks for the comments. One of the quotes that ended up on the cutting room floor from these interviews was a note about how the Pennsylvania Liquor Board isn't even willing to look at wines now unless they have been discounted at least 50%.

Brooke wrote:
04.19.10 at 9:11 AM

Makes me very glad that I work not just for a winery that lets me have my freelance writing gig on the side but for a winery that is family owned (and truly owned, always paying for everything up front and in full), sticks to their guns when it comes to growing, producing and bottling their wines at their 12-acre estate. They're a rare bird in this industry.

Richard wrote:
04.19.10 at 9:42 AM

Thanks for the article. You make some great points, and, yes, there are wineries going out of business and many to come - anyone who lives and works in Napa and the industry knows some of the biggest boutique names in the business will likely go out of business by the end of the year - many, because they follow the model that Kate Somple wrote about above.

However, I have to echo Brian and Randy's comments above - I am one of the "custom crush" people - I get good grapes; good barrels; and make good wine. I started small and used savings; did not get loans; and while I started in 2004 and have fairly high-end prices - the past six months has been just the opposite of what your doom and gloom "Deep Tank" describes Alder. My sales are up and DTC seems to be the wave of the future. Of course, I did not get on the romantic bandwagon and expect to be a Robt. Parker written up wine producer. I started small, mainly because I liked wine - friends tasted it and said "hey! you should sell this." I did and my first two vintages are sold out.

So, while you make some excellent points, or rather, "Deep Tank" makes some excellent points, and there are a lot of wineries, especially "Custom Crushers" who did not have a business model, but only a starry eyed romanticism, who will go out of business. I think the write up is overly alarmist. At least I hope it is - perhaps my experience is an anomaly and I too will go out of business....

Bill wrote:
04.19.10 at 10:03 AM

The "Workout Winemaker" cited in the blog works for the bank; that is, he is a "creditor guy". Wineries need a workout guy that is a "debtor guy" that works and protects them from the bank. That's what we do. Works the same in the wine industry as it does in any other. Debtors have recourse and protections and should avail themselves of them for the best outcome from this difficult situation.

mdsaxon wrote:
04.19.10 at 10:49 AM

Steven W.-Couldn't agree more!
I have just created two wine list in Montgomery, Alabama (not the wine consuption capital of the world, but the public here is just begining to become educated and are thirsty!) for a restaurant owner who has just opened a bar and a high-end restaurant. I argued and convinced him away from the traditional 3X mark-up to a 2X mark-up. The wine list looks incredible and is giving MANY more options for BTG. What good is an expensive Pinot or Cab doing sitting on the shelf? It may be prestigious to have it on the list, but wouldn't it be better to enhance a guest's experience with a great bottle or glass of wine at an affordable price?

04.19.10 at 6:20 PM

Deep Tank is speaking from an informed position. I know because he is competitor of mine. We look at all the same deals and from time to time we actually talk with someone who can be honest about the situation. People are in trouble, wine is backed up and the decks are awash. Time for reinvention.

The shortages of 2008 are infinitesimal when compared to the backward pressure being exerted on wineries and in turn growers. Wines is stacked deep around the globe. From the quays in Bordeaux to the warehouses in AmCAN and New Jersey, space is filled with wine from micro-crush to macro-vin and everything in between. Australia is burning and every time the USD slips they figure out how to ace another sale from a beleaugered american who can't control his pocket book when it comes to Koalas. Three tiers of obstruction and a broken wheel make the deal more complex by the minute.

Wine pricing and grape pricing and real estate pricing are intrinsically tied. The fact is that there are millions of gallons of wine that are available today and will continue to be available vintage to vintage. Planting is a little unbalanced at the upper end, vineyards that were once designed to support bottle prices of $30.00 and north have figured out that their cash cows have been turned into burgers. The fruit that is available in 2010 and beyond is truly mind bending. Unobtainable branded Napa vineyards are pricing wine deals at $12-18/Gal that translates to 1800-2250/ton less crush fees. These deals are simply grape deals that put the onus of winemaking on the grower with terms that meet the needs of the marketing partner. These deals are not recorded in the California Grape Crush report. Thus buoying Grape sales averages. And skewing pricing for all involved. To those of you who dismiss this trend as bottom feeding, I assure you that you would give your eye teeth to get into some of these vineyards.

Guess what?

The smart guys, they are happy to have the business.

The over-levered winery of today is an opportunity for consumers and disciplined winegrowers.

To those of you who have feretted money down the rathole with vanity wineries and the like, keep the situation in perspective. You were always superfluous and ultimately expendable to the industry. Your cash and enthusiasm were necessary to the cause.

To those of you with fresh ideas and capital come on in the water's warm. Its mostly upriver and some of you might actually make it here. I'll even sell you a paddle.

Warm Regards

Mephistopheles

Rob McMillan wrote:
04.20.10 at 9:28 AM

I like the article because it’s steamy and well written - like a novel, but the proposition is wrong on its face. It's fiction with a hint at one part of the story.
The business is actually quite healthy and improving. People rubber neck when they see an accident, but that accident doesn't describe the condition of the freeway; just a data point on the freeway.
The wine business is not homogenous - less so now that at any time in the 30 years in which I've been involved. The part you are describing is the minority; perhaps limited to 7% or less by number. Describing the majority of the business, whether you choose to talk about case volumes, bonded wineries, or price points - will give you an entirely different view. But I can't wait for the sequel!
We will have our Annual State of the Industry released on May 3rd. It will acknowledge the pain points but paint a different picture that this.

BaroloDude wrote:
04.20.10 at 2:40 PM

when "Screaming Eagle Til Sold Out" opens for business and offers 80% off, i still won't be able to bite. :-( Thanks for the good article Alder.

Hedged Opinion? wrote:
04.21.10 at 10:28 AM

I'm a hedge fund manager and I'm thinking of a new business model for the wine industry.

@Kate Somple. Excellent insight. Really great.

@ Rob McMillan. I've had dealings with your bank before on both the technology side and one very brief encounter with your group. I'd give your bank an overall rating of 50% due to your group. I'll tell you need to immediately fire someone on your team. You figure it out.

I like the articles frankness except that it paints many good people with the "loser" brush because they entered the business with "eyes filled with romance and passion" To me, that's a great reason to enter any business. Of course you have to back it up with some business acumen but they aren't losers.

Mychal Greenwood wrote:
04.21.10 at 2:13 PM

Hedge Opinion, agree wholeheartedly with your opinions.

As a "retired" financial executive here in the Napa Valley, it has been astonishing to see the lack of financial and administrative acumen knowing a major economic crisis could "push everything over the edge". The acquisitions we have seen in the last 6 months have been astonishing as those wineries with a "developers/investors" mentality have "picked over" the carcasses of the "fallen".

Would enjoy talking "offline" if you have the opportunity ([email protected]).

04.21.10 at 3:52 PM

Great article, but reminiscent of the "Merlot Bubble" popping. Many people jumping on the bandwagon, trying to make a quick buck, making plonk wine. Now (post-sideways) we are seeing that the strong Merlot producers are still in business and the plonk wines are mainly gone by the wayside. I think what we are seeing is a similar shake-out of the industry as a whole; losing the vanity wines that probably should not have been there in the first place. Yes, some ligit businesses will go out of business, but we are in a deep recession and that is what happens. The strong will survive and prosper- Alder and readers- you make a great point, you have to have both a good product and a good business model, just like in any business.

Charles Kirkwood wrote:
04.22.10 at 2:58 PM

While many of the points mentioned in the article are true, it is also very misleading. What is more likely going to happen is that these banks are going to allow wineries to remain in business as long as the winery has inventory, but will not loan any more capital. What that means, is that these wineries – without the consumer or even distributor knowing have ceased to actually exists on any physical level and is no longer producing wine. Furthermore, in many cases that inventory will be sold to more well known clearing houses such as Costco, Sam’s Club, Cost Plus, Pennsylvania Liquor Control Board, Utah, etc as opposed to being passed through the traditional three tier system, or through wine closeout websites as mentioned in the article. IF they are passed through that system, rarely if ever will the consumer actually see any significant savings as it is beneficial to the banks, wineries, clearing houses and distributors to maintain a certain amount if integrity of the label in order to recoup financial loss.

Most importantly – with the Blue Chip producers who are now in fact defunct and are producing no more wine (many of which you know and respect), these “labels” are being sold to large corporations such as Inbev (Budweiser), Fosters, Constellation, etc. These companies have no intention of maintaining any sense of quality on the level that you and I appreciate, nor do they have any intention of passing along savings.

The point I am trying to make is that while there may be some drop in pricing, you won’t see much. Prices will remain at a comparable level until the wine runs out, at which point about a third of the producers that currently “exist” in California, Oregon and Washington will no longer exist. The ones that do remain will require vigilance by the consumer to verify quality. Just because it says "Blue Chip Brand" on the label, doesn’t mean that Foster’s has put "Blue Chip Brand" quality into the bottle.

Laser wrote:
04.26.10 at 7:56 AM

Well here we go again, greed raises it's ugly head. Here in the Midwest, (which the west and east think we can't produce good marketable wine) are doing just fine. How? By sticking to the basics. Volunteer help when harvest is here. For you snobs, thats aka friends of the winery. Something you guy's should have had more of, instead of filling the pockets of all those middlemen.

Tom Thornton wrote:
04.27.10 at 10:02 AM

When a 2007 Paul Hobbs Pinot with two 90+ scores is up at 33% off (as it is today on Last Call Wines), you know a lot of folks are in for a bumpy ride.

klags wrote:
05.15.10 at 7:54 AM

All I can say is that this is what they all get for making piles of over-priced wine with "gobs of fruit" that they make in order to get a score and sell for too much money. And frankly I'm happy to see the California wine scene take a hit, because we can put the focus back where it belongs, squarely on the higher quality and lower priced wines of France and Italy that are not bastardized to all taste the same. I'm in the industry, and the wines that are selling at those prices and in that style have history, a story, and TRUE QUALITY behind them, not just a big name, closeout juice, giant tanks or a 200% new oak program. There is more to wine than commerce, and this is a good lesson for wineries - now not only will they have to stop to think about business, but maybe now they'll stop overproducing garbage, and put a little thought into the vineyard practices for once!

Deep Tank Hater wrote:
05.20.10 at 9:33 PM

I think Deep Tank is full of shit. Personally, I think he's Dick Cheney, nothing more than a fearmonger. Deep Tank spreads fear, which to him equals profits. No different than Halliburton with the Iraq war.

Leo M wrote:
06.22.10 at 8:23 PM

The Price of Luxe

This is the lead story in the Napa Valley.

Rarer than a 90-point bottle of wine is wine journalism. Having said that, this was a great story, largely because it does not bury the lead as they say in news idiom. Just today stories by wine writers are generally touting increased wine sales.

There is a follow-up story that needs to be written. Great Recession may have commoditized Cabernet Sauvignon. Much like Chardonnay the difficulty is the slide in the price of wines from Luxe.

There is an even tougher story to tell, largely because it supports the 100-point scores.

Turns out that Cabernet Sauvignon and Pinot Noir prices slide much less for companies with a trailing average 90-plus point score.

John wrote:
07.15.10 at 1:02 PM

Good article, if a little inflammatory. However, it closes with a leap in logic: "... the California wine industry is in for some seriously troubled times in the next couple of years." $30+ Napa and Sonoma wine does not equal the California wine industry; it is a small part. From the Wine Institute web site: During the recessionary 2009 economy, California vintners shipped 467.7 million gallons (196.7 million cases) of California wine to the U.S. wine market in 2009, up a modest 0.2% compared to the previous year’s volume. The estimated retail value of these sales was $17.9 billion, down 3% from 2008 as consumers traded down to lower-priced wines, according to wine industry consultants Gomberg, Fredrikson & Associates in Woodside." For many people, wine is an "affordable luxury," the question is the price of the bottle.

Ian wrote:
09.19.11 at 10:33 PM

way overblown.

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