Oregon Expects Wine Surplus
Speakers help wine producers plan for challenges of oversupply amid recession
Ted Farthing, executive director of the Oregon Wine Board, introduced a panel discussion called "Charting Our Course in Challenging Times" by sharing the results of a survey of the state's 30 biggest growers to estimate the 2009 crop. The reality check came from three Californians.
One of the panelists confirmed the surplus situation. Chris Welch, a broker of grapes and bulk wine with the Ciatti Co., San Rafael, Calif., estimated that Oregon's 2009 Pinot Noir crush amounted to 28,000 tons, a sizeable increase over 2008’s 17,500 tons. The Pinot Gris estimate was 7,000 tons, up 18% from 2008.
The situation is similar for Oregon Pinot Gris. Welch estimated the grape cost per ton in 2009 at $1,390, and the cost per gallon of wine at $8, while California bulk Pinot Gris is less expensive. Pinot Gris has become the No. 2 white wine variety in California, and with California's 2009 crush measuring the largest since 2005, there is a supply that dwarfs Oregon's.
Potential buyers of surplus Oregon Pinot Noir are not necessarily the same as those for California bulk wine, but Welch urged the Oregonians to heed what is happening in other regions as they plan how to deal with their excess. He noted that New Zealand's oversupply of Sauvignon Blanc is eerily similar to Oregon's situation with Pinot Noir.
Farthing said that even though Oregon wine is a niche market, accounting for only .8% of U.S. wine production and just .5% of U.S. wine consumption, the surplus may still be problematic. Winery inventories have built up since the recession began, he noted, since on-premise sales went down drastically and restaurants continue to sell off their inventory without reordering much. He said most distributors are not acquiring new brands, and they may be slower than usual to pay wineries.
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• Continue to improve efficiencies in the vineyard to maintain gross ton per acre margins.
• Control cost of production. Custom crush prices should be on par with other markets, he said.
• Do not fear marketing less expensive Oregon Pinot Noir. It would give the state good exposure in new markets, Welch said, reassuring the audience that consumers don't damn a region for including affordable wines. He said people understand that a $15 Napa Cabernet is not going to taste like Screaming Eagle.
• Unite for the common good.
• Restrict yields in bigger years.
• Avoid dumping products in the wrong markets. Welch advised not to go to foreign markets, because it is not easy to overcome a low-priced introduction. U.S. markets like Texas and Florida would make more sense, he said.
He said 30% of Oregon wineries reported their financial situations as weak, slightly more than the national average of 28%. "That doesn't mean you are going to see 30% of them tank, go out of business, but just that 30% are struggling and have some big challenges."
"Wineries always feel worse in this part of the demand cycle," he counseled. Consumers currently ask why they should pay more for one wine when they can buy a similar one for less. McMillan said there may be a two-year cycle when the wine industry rationalizes this -- wineries determine how to lower their own costs on the lower-priced wines to make them profitable. Then consumers who drink the low-priced wines begin to realize it's not high enough quality for them, and they start going back up the price scale.
McMillan predicted 5%-10% growth in sales in 2010, modest improvements in restaurant sales and continuing compressed margins because of discounts.
Some good news came from Christian Miller, research director of Wine Opinions and proprietor of Full Glass Research. "No, it's not like the Great Depression," he said, noting that unemployment in that era hit 35% for four years. But the triple dips of reduced median incomes, median home prices being down and the S&P 500 index plummeting have meant that most everyone is spending less on wine, even including those consumers who say their financial situations have improved recently.
Miller said his market research shows that frequent wine drinkers have good awareness of Oregon wines, hold a very positive image of them, and prefer Oregon Pinot Noir to Californian Pinot Noir in the $30-and-above price range. Still, his surveys showed that most avid consumers outside the Pacific Northwest have difficulty finding Oregon wines.
His advice echoed Chris Welch's on at least one point: More strong Oregon Pinot Noir brands in the $15-$20 range would help the state's distribution and visibility. He also recommended that Oregon continue to develop wine tourism, take the high ground on green issues, work on direct sales and small-scale distribution, better define Pinot Gris, consider more emphasis on Riesling production (currently a hot varietal), and encourage southern Oregon and Columbia Valley to supply "Oregon" labeled brands.