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June 2009 Issue of Wines & Vines
 
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What's Good About The Recession?

Ten silver linings for the wine industry

 
by Tim Patterson
 
 
Wineries and the Recession
 
    HIGHLIGHTS
     

     
  • Silver linings in the storm clouds are becoming visible, certainly for wine consumers, but also for many segments of the industry.
     
  • Wine sales, in volume, were up last year, and a wave of Millennials makes it likely that they will continue to increase for years to come.
     
  • Industry analysts point to 10 positive trends now under way that can build solid foundations for a stronger, broader-based, truly national wine industry.
     
For months on end, reports about the state of the economy have been gloomy enough to make you just want to go have a drink--and that's great news for the wine industry.

Unless you're in the repo business, nobody welcomes a recession, especially a downturn on steroids like this one, global in scope and far-reaching in its impact. But if you're stuck in one anyway, you could do worse than to ride it out with wine, which has shown itself in past cycles to be close to recession-proof--at least in the volumes that continue to be consumed, if not always in the old prices. In hard times, wine is liquid comfort food for everyday drinking. It's an affordable luxury for weekend splurging--if, that is, you can afford to splurge at all.

There's plenty of pain to go around, particularly at the high end and for smaller players with limited resources and fewer options for adapting to changing circumstances. Pricey brands--especially newer, less established ones--are exposed; restaurant sales of expensive bottles have plummeted; many wineries will have to sit on and refinance valuable inventory; ultra-premium grapes may have trouble finding buyers and holding the line on prices; smaller labels will find competing with the big boys for distribution and shelf space more difficult than ever. Foreclosures, bankruptcies, distress sales and further consolidation all will be with us. Price pressure could put a permanent dent in the market for fine wine, strengthening the view of wine as a commodity.

At the same time, numbers out there suggest that wine sales and shipments are up--that is, up as in increasing. In April, the Wine Institute gave wide publicity to a report from Gomberg, Fredrikson & Associates indicating that 2008 California wine sales to the U.S. market edged up 2% in volume over the previous year to an estimated 467 million gallons, despite a miserable fourth-quarter economic climate; total California winery shipments to both the U.S. and export markets increased 3% in volume to 570 million gallons, and the estimated retail value of shipments to the U.S. market totaled approximately $18.5 billion, down only slightly from 2007.

"A lot of businesses would be pretty happy with a 2% increase in volume," says Bill Turrentine, president of the Turrentine wine brokerage. How does that compare with, say, your local GM dealer?

The genesis for this "good news" story came when I was sitting at lunch with a couple wine writers at the World of Pinot Noir earlier this year, cracking jokes about the economy falling off a cliff. We started thinking, "You know, with money tight, and French oak at $1,100 a barrel, we're gonna get a lot less oaky wine--and that's a good thing!" Talking with a number of leading industry analysts, a lot of other silver linings in the storm clouds got clearer and clearer--certainly for wine consumers, but also for many segments of the industry, including some likely trends that can build solid foundations for a stronger, broader-based, truly national wine industry--hopefully not too far down the road.

1. At least we're not in a glut

The overall message from the all-star panel at the "State of the Wine Industry" session at this past January's Unified Wine and Grape Symposium in Sacramento offered at least some comfort: This recession isn't hitting the wine industry at a time when it's already in a glut, over-supplied with grapes and bulk wine, which was the case in the last two downturns. Having bearing grape acreage and stocks of wine in reasonable balance with demand, even close to short in some segments, provides a measure of protection against savage price-cutting. OK, maybe that's like piling sandbags on the levee at the flood tide of price pressure, but sandbags have saved a lot of cities.

While acknowledging this positive factor, several of the people I spoke with noted that in today's global wine market, the scope of supply is international, far beyond California, and there are already plenty of indications that the biggest players will be bringing in the tankers from Argentina and the south of France to fill out their value-priced lines. Still, as the starting point for a recession, this is, for once, good timing.

2. Value producers on a roll

Valued Wine
 
Demand for wine is expected to remain strong, especially in the $15-and-under category.
 
The difficulties in selling $100 bottles of wine will be more than matched by the increased demand for $15 wine--and $10, $7 and even $3 wine. Producers who can supply reliably good, interesting, drinkable wine at all the various affordable, value price-points--and there are lots of such points under $20, depending on the consumer--should be able to move product and keep the cash flowing, and with luck, they may further expand brand visibility and loyalty. The quality of value-priced wines will edge up, as fruit originally destined for one price-point gets downgraded into the next tier's wines. As a sign of the times, Don Sebastiani & Sons, already a veritable font of new, hip, value-laden labels, announced it would be adding 14 positions to its sales force in 2009, and with good reason.

The big winners here, of course, will be the already big. Gearing up a ne w 300,000-case value brand takes quite a while, by which time the economy may be in some other state altogether. Boutique wineries can't make ends meet selling bottles with single-digit prices, so small producers will have to rely on other winning strategies, some of which are discussed below and some in Jason Haas' companion article, to keep consumer attention. And beyond the differential impact within the industry, the coming boom in value-priced wines can only reinforce the ongoing trend toward greater wine consumption across the country and across demographic groups--laying excellent groundwork for the future.

3. Millennials to the rescue

Alternative text
 
The Millennial generation embraces diversity when it comes to wine, so taking a chance on a new variety may very well pay off with sales to this market of young wine drinkers.
PHOTO: Peter Novak, Wikipedia
 
Demand for wine may be steady at the moment, but will it stay that way as tight times persist? The unstoppable reason for optimism here, says John Gillespie of the Wine Market Council, is the 49 million drinking-age members of the Millennial Generation, now between 21 and 32, who have taken to wine in record numbers. "We have," he notes, "another 23 million in the pipeline who will reach drinking age in the next five years." Assuming those new entrants behave like the leading edge of their cohort, which seems likely, wine consumption will undoubtedly increase in the near term, recession or no recession.

4. Compensating at the high end

Alternative text
 
Smaller wine regions (such as northeast Ohio's Grand River Valley appellation, above) may benefit from the economic downturn.
Prospects at the highest end of the luxury wine market are not pretty to contemplate. Leo McCloskey of Enologix, who has consulted for a lot of producers of $100-plus wines over the years, thinks the age of $150 California wine is over, an artifact of an era in which too many bankers had too much disposable income to throw around.

There are, however, important mitigating factors worth noting. First, says analyst Jon Fredrikson, prices for Napa Cabernets and similar high-end wines are, at least for now, generally holding: Fewer pricey bottles are selling, but there is no rush toward steep discounts for established, iconic and near-iconic labels. Some wine may be sold below retail price through less visible channels--wine club discounts, for example--but wine shop shelf prices right now look sticky.

And second, Fredrikson says, the 2007s from prime California areas, still mainly in barrel, promise to be an extremely good vintage, rated so far by critics as better than their 2007 French counterparts. If wineries can finance holding that inventory for a while, rather than selling it off for cash flow, they will be well positioned to take advantage of a potential recovery a year or two or three from now.

5. Style shifts for the better

Now back to where this exploration started: the prohibitive cost, under the circumstances, of routine purchases of truckloads of new French oak--and for that matter, new American oak. Many wineries can be expected to find hidden virtues in all those second- and third-fill barrels already on hand. Value brands will continue to move toward alternatives, but higher-end wineries will more likely choose to retain the many merits of barrel aging without as many obvious lashings of fresh lumber--and they'll make better wine in the process.

A trend away from over-oaked Chardonnay and toward crisper, place-driven versions is already under way, according to Gillespie and other observers, and economic pressures will only accelerate that movement. Leo McCloskey agrees, and thinks we'll see--or taste--the same pullback in high-end red wines.

This is not only good news for those of us who find excessive oakiness unpleasant; more than that, it's a move away from a distressing sameness in too many top-tier wines, a status-and-ratings-driven resort to recipe winemaking. With the oak ratcheted back, the grapes, the regional identities, and the vineyard potential will be much more on display, making for a broader range of more distinctive wines. It's possible that some Emperor-grade wines will prove to have no clothes once the oak has been shed, but more likely, wines that are well made and full of character under the lactones will have a better chance to shine.

6. Diversity can thrive (Millennials II)

Conventional wisdom, Bill Turrentine says, is that consumers in a recession become less adventurous: "Sales of navy blue blazers go up, things that are tried and true, and in the same way people are likely to spend money on wines they know." That may well be true for many wine-drinking Boomers, set in their ways after a couple decades of wine drinking, sticking with their favorite name-brand Merlots and Sauvignon Blancs for reassurance.

But there's no reason to believe the mushrooming Millennials will suddenly go safe on us. This growing market segment will undoubtedly keep experimenting, keep trying anything that tastes good and fits into their daily and special occasion lifestyles, check out innovative packaging, and keep searching for novelty and value in a wine experience. For these drinkers, a $15 Albariño will still be worth a fling, or a rationally priced Tempranillo, or a Rhône-style blend based on grapes nobody has heard of.

Good news for consumers

Wine Lift
Good news for consumers While the current economic mess is a mixed bag for different segments of the wine industry, for civilian wine drinkers, as Tom Wark puts it, "There's never been a better time to be a wine consumer."

• Bargains and discounts are starting to show up everywhere, in every wine channel;

• Wine quality at every price-point should improve, as grapes originally slated for $30 wine end up in $15 wine, and so on, and extreme value wines will have more fruit to work with;

• For those few who still have lots of cash on hand, it will become easier to penetrate those locked-up cult wine mailing lists;

• Relaxation of prohibitions against interstate shipping will get a boost from state legislatures in search of revenue, making wine easier to obtain;

• Restaurants are already cutting or eliminating corkage fees and promoting BYOB nights to maintain customer traffic; and

• Oaky wines will be on the decline, fruit- and place-driven wines will be on the rise.

• The only bad news for consumers: You still need a job to be able to afford any wine at all.

T.P.

Growers are unlikely to bud many of their vines over to Refosco or Lagrein in times like these, but small- and medium-sized wineries that can get their hands on specialty grapes can go a long way toward making their wine club and tasting room offerings stand out from the crowd, which is essential for survival in a more competitive environment.

7. The 50-state wine boom

Another existing trend that should benefit from the economic pinch is the amazing expansion of American wine country to all 50 states. I am still digesting the fact, learned by parochial me earlier this year, that Michigan has at least five wine trails, boasting more than 40 wineries. Jim Trezise, executive director of the New York Wine & Grape Foundation, notes that Iowa has 75 wineries--Iowa!--and that the largest-selling label in the Des Moines area is a local brand, Somerset, hailing from the legendary wine mecca of Indianola.

If Paris is too expensive this year, go for some long weekends on the Keuka and Seneca and Cayuga wine trails in New York's Finger Lakes region instead. If you can't afford the annual pilgrimage to the fleshpots of Napa, check out the scenery and good wines out around Traverse City, Mich. Overnighters in the Willamette Valley and Walla Walla sound better all the time. People in a recession find their pleasures closer to home, and now nearly everybody in the country can have an interesting day in the
wine country for the (thankfully not astronomical) price of a tank of gas.

Local wineries--at least those with tasting rooms--stand to benefit. What will come out of this is more diversity--more wines and regions and styles becoming accepted as worthy guests at the table of wine--and a further broadening of a mass wine culture in the United States. Talk about silver linings.

8. Budget marketing on the Internet

Marketing campaigns are another expense category wineries will be examining closely, making the Internet beckon even more as a channel for getting the word out and the orders in. For individual wineries, says Tom Wark, wine PR consultant, blogger and executive director of the Specialty Wine Retailers Association, direct e-mail campaigns cost almost nothing, so wise wineries will be working their lists, cultivating their wine clubs, targeting likely repeat customers and offering deals. (My inbox is certainly getting more traffic these days.) Websites that specialize in aggregating small producers and offering their bottles to a wider public should also do a brisker business. And all of this will be helped by point 9:

9. Easier interstate shipping

Wine Lift

Wark, who is active in efforts to reform state laws that discourage interstate wine shipment, sees a further opening in the recession. State legislatures are desperately seeking revenue sources, and we know they love to tax sin, so an openness to clearing the brush away from direct-to-consumer and direct-to-retail shipping is already getting a boost from the prospect of gaining fresh revenues.

Once again, the broader positive impact--besides happier consumers--is bound to be more diversity, more regional wines getting a shot outside their regions, and more options for struggling wineries to find markets. Sure, California wine shippers, the 800-pound gorillas of the American industry, will get most of the benefit. But me, I'm thrilled at the prospect that Tennessee seems to be in play.

10. Growers

If growers can't find a way to get through this, we're all in trouble: no grapes means no wine--and, I might add, no wine writers. The first piece of good news here, says Nat DiBuduo of Allied Grape Growers, is that with the housing market in free fall, the pressure to gobble up ag land and turn it into suburbia has been laid to rest for a good long while.

With wineries focused on lower-priced, value wines, they'll be on the lookout for value-priced grapes. So chances are good, say DiBuduo and Karen Ross of the California Association of Winegrape Growers, that growers in Lodi, the northern San Joaquin Valley and perhaps other places like Lake County, will be in a relatively good position. Growers of pricier North Coast grapes, and certainly anybody not under an airtight contract, could be in more trouble.

Finally, the recession might help put to rest one of the major myths of contemporary premium grapegrowing: that good grapes can only come from drastically low crop yields. Karen Ross notes more and more research indicating that the relationship between yield--especially yield per acre, an almost meaningless number because of all the planting variables--and wine quality is not a simple inverse law mandating that lower equals better. Because everybody has to look at the math again, draconian yield limits may prove to be one of those luxuries that aren't affordable. There's an opening here to revisit what really goes into quality grapes, and growers can benefit in the long run.

Buckle up. This will be an interesting ride.

Tough spots in the industry
 

 
While there are some positive openings in the recession for parts of the wine industry, there are also some tough spots to be in, markets and sectors that will be challenged to adapt and survive. Some of the areas most squeezed are likely to be:

• Ultra-premium, luxury wines are already meeting consumer resistance and will face the unpleasant choice of discounting their wines or paying to hold onto inventory until demand picks back up.

• Restaurant wine sales are down sharply, especially for more expensive bottles; this is not only an issue for the restaurants, but, as John Gillespie notes, for the sizable number of high-profile wineries that have built their brands around a strategy of on-premise sales.

• Starting a new brand, unless it's a spin-off from an existing operation, is perilous; when I asked Jon Fredrikson about launching a new $100 Cabernet Sauvignon now, he simply laughed.

• Smaller wineries, including the thousands of under-20,000-case efforts that have appeared in the last decade, will face an even steeper uphill battle for distribution and shelf space alongside the value-priced major corporations. There are strategies that will work, but there will also be many casualties.

• Wine clubs will have to prove themselves as consumers sort through their multiple mailings and pick the ones that deliver the most bang for the buck.

• Equipment suppliers are likely to see slowdowns in purchases of major capital equipment; cooperages may sell less new oak.

•Brands that have to go head-to-head with imports will be feeling the pressure--including from labels imported by the largest U.S.-based conglomerate producers.

T.P.
 
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