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Good News About U.S. Economy and Wine Sales

Economist tells Napa audience that economy is recovering steadily; experts discuss market for wine grapes

by Paul Franson
cabernet price napa
Source: Andy Beckstoffer

Napa, Calif.—This year, the Impact Napa conference sponsored by the North Bay (California) Business Journal focused on the wine business, and the sell-out crowd heard plenty of good news.

The audience of vintners, growers, lenders and community leaders probably expected to hear good news from the panel of four renowned wine industry figures, but they were mostly surprised at the good news about the U.S. economy that came from Chris Thornburg of Beacon Economics.

“The economy is recovering steadily. It’s just not rebounding in a big bounce as in earlier recessions,” said Thornburg, whose Los Angeles-based consulting company took pride in being one of the most adamant predictors of the subprime housing market meltdown. He used statistics to demonstrate that, in spite of the rancorous politicking we’re enduring, the U.S. economy is in pretty good shape by almost every measure:

• GDP is growing at 2.04% compared to an average of 2.64% for the period from 1985 until now.

• The private sector is growing at 3.63%, compared to an average 2.29%, but public growth is negative due to budget issues and spending cuts.

• Unemployment is a bit weak at 8.30 % compared to 6.07%, but this, too, is changing. The figures are skewed, he said, as the economy improves and more people seek jobs.

Slow and steady U.S. recovery

A new phenomenon is the growth in “informal employment,” particularly among immigrants. In California, for example, Thornburg said 1.8 million people—10% of the workforce—are self-employed and therefore don’t count in the “jobs” listings. That number is especially high in agriculture.

Average personal income is also the highest in the world. “Everyone else in the world thinks we’re doing great; that’s why they’re investing here.”

Thornburg also points out that housing has turned the corner, with inventory (a leading indicator unlike prices) dropping—as are foreclosures and vacancy rates. Residential construction is up, too.

Home prices are down from the 2008 bubble, but Thornburg said those were unrealistic and unsustainable.

He also debunked a favorite refrain that low taxes boost the economy. “Changes in taxes only cause temporary impacts. And when taxes are reduced—they’re now at their lowest level in ages—they increase consumer spending: They benefit the Chinese economy, not ours!”

If instead of cutting taxes the government had spent the money on infrastructure like roads, schools and high-speed trains, it would have created jobs here and boosted our economy, Thornburg said.

He also pointed out that the Napa economy is doing fine but undergoing an unusual phenomenon: In wine and tourism, numbers are down but revenues are up. Specifically, hotel occupancy is steady, but revenue per room is up. And grape tonnage has been down, but prices are up.

The wine panel

Reflecting Napa’s orientation, Bart Araujo and Jayson Pahlmeyer represented two high-end boutique wineries (Araujo Estate Wines and Pahlmeyer Winery, respectively), while Andy Beckstoffer spoke as the largest independent grower of high-end grapes in the county.

Mario Zepponi spoke about sales, mergers and acquisitions.

Araujo’s Cabernet sells for $300 per bottle, and two-thirds of his business is direct, with the rest going to restaurants. He said his business wasn’t largely affected by the downturn, although his winery did allow consumers two months instead of three weeks to order their allocations, and likewise allowed businesses to order in six months instead of two.

Pahlmeyer, whose priciest bottle tops out at $115 for Cabernet, said, “Direct-to-consumer sales saved our bacon.” He also said he views Bordeaux and Burgundy estates as his competition and that Napa prices are a bargain compared to the French prices that reach higher than $1,000 per bottle.

Beckstoffer noted that a wide disparity had arisen in the prices for Napa Cabernet. In 1991, the average price was about $1,688 per ton and all the prices were pretty similar.

The average price of Napa Cab hasn’t changed much in recent years—it’s around $4,700 per ton—but starting in the early 2000s, prices began to diverge.

Wineries could buy Napa Cabs from less than $3,000 to more than $9,000 per ton in 2011. “You could buy high tonnage at low prices. That’s a new phenomenon.”

He quoted figures showing that the number of contracts greater than 100 tons and priced at $3,000 per ton or less grew from 9% of the purchased grapes in 2008 to 19% in 2011.

He attributed that growth in cheap grapes to the planting boom of the 1990s, when people planted vines in spots that weren’t really suitable for top grapes. “That led to the $15 Napa Cab. Those wines didn’t exist before.” He also questioned whether sources for those wines will continue as supplies tighten.

Beckstoffer pointed out that a large number of Napa’s vines would have to be replanted in the next five years. The result will be higher quality—but not necessarily higher yield—and in the meantime, it will reduce grape supply.

He added that it costs $25,000 to $30,000 per acre to replant. “That’s a great opportunity for suppliers—and lenders.”

The grower also admitted, “We charge what the market will bear. The cost of farming grapes for a $30 bottle and a $100 bottle isn’t that different.” He said it costs $7,000 to $8,000 per acre to farm grapevines—one reason he doesn’t grow Carneros Pinot or Chardonnay, which sell for much less per ton than his Cabernet.

Mario Zepponi of merger and acquisition consultant Zepponi & Co. added that 2010 was the low point in the wine business. The luxury end w as decimated,” he said, but the industry has rebounded.

One step wineries took was to create or expand second labels. “It was a successful strategy to get through the worst part of the crisis,” Zepponi said. “Now the industry is in a healthy rebound.”

He also added that vineyard values haven’t recovered except for “marquee” properties, but tight restrictions on growing still make vineyards good buys for the future.

The mood at the conference, like that of most such meetings this year, was definitely upbeat. Beckstoffer summed it up, “There are plenty more opportunities for family-owned quality wineries.”

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