Recession Not Over for Wine Industry
At Napa financial symposium, some express doubt that wine sales will ever return to 'normal'
The meetings were conceived by David Freed, chairman of The Silverado Group, who said he started them almost 20 years ago to improve communications between the industry and its lenders and investors.
While acknowledging that things have improved compared to last year, most attendees agreed with a survey taken before the meeting, the results of which indicate that the economy still faces a long comeback. In fact, the most often-asked question was, “When will things return to normal, if ever?”
That question, of course, related primarily to whether consumers will resume their pre-2008 free-spending days and resume buying expensive wines.
For now, the answer is clearly, "Not soon." Most consumers have traded down, and though sales of wines over $25 are up once again, most experts think it’s because so many are heavily discounted -- and the improvement is only in comparison with a dismal 2009.
A number of speakers presented data or opinions that many consumers who’ve traded down are happy with the cheaper wine they’re buying. Speaker Tony Correia suggested that may be because they’re buying more expensive wine at a lower price, albeit under a different label.
Only 109 respondents completed the annual survey sent to registrants before the conference, but they were an optimistic lot. Robert Smiley, the long-time partner of the symposium and dean emeritus of the University of California, Davis, Graduate School of Management presented both the survey data and anecdotal comments from 28 high-level executives across the industry.
Fifty-six percent of winery respondents predicted things will get back to normal within three years, 22% within five years, and an equal number said, “Never.” Fewer than 10% saw this happening within a year.
The executives mostly felt that the wine economy has hit bottom, admitting that profits are way down. Many also expected a permanent restructuring of the market and have adjusted their operations to accept lower prices. They also cited the impending impact of water shortages.
The conference began with breakout sessions, including one about whether vineyard values reflect lower bottle prices. Appraiser Tony Correia and winery/vineyard broker Joe Ciatti agreed that top properties remain relatively strong, while those in weaker areas are being hit hard.
Correia noted that few vines have been planted for the past five years, and that’s sure to lead to future shortages. “California winegrape acreage is down since 2001 -- except for the Pinot sisters (Grigio/Gris and Noir),” Ciatti added.
Ciatti estimated the crush this year will come in at 3.2 million tons, less than the official state estimate of 3.5 million, and down significantly from last year’s 3.7 million tons. That could help firm grape prices.
Another surprising trend noted at the conference was a huge growth in Muscat/Moscato, with Sutter Home and Gallo selling all they can make. It may be driven by inner-city fans who mix it with vodka, but whatever the reason, the varietal is hot. There seems to be little opportunity left for smaller wineries there, however.
A panel of bankers delivered the news that almost all banks serving the wine business are trying to expand their load portfolios, but demand is suppressed despite low rates.
One banker privately said he’s run into tough competition for loaning money to qualified clients. All agreed, however, that they’ve returned to the tighter standards of yesterday. “Frankly, we shouldn’t have made some of those loans,” one said.
The second day of the symposium included a lot of meat, too, with a provocative talk by Bill Leigon, president of Hahn Estates, which created the hot Rex Goliath brand. He started by jokingly apologizing for helping unleash the critter label boom, which he said is dead. “People are seeking authenticity,” he stressed, a message echoed repeatedly by other speakers.
Leigon also debunked wineries’ hopes for the often-touted Millennial generation to bail them out, at least anytime soon. “They don’t have jobs; they’re moving back in with their parents.”
He also said that the Boomer generation, which does have money, is turning out to be most receptive to social media in spite of perceptions.
Leigon said that general media are very powerful and should get more attention. “A front page story on The New York Times is 1,000 times more powerful than a wine review,” he said.
He also warned wineries that social media aren’t good channels for sales, but are better for creating awareness and changing perceptions. “It should drive customers to retail.” He regards the new social media tools including blogging as the cheaper, more efficient successor to the relationship buildi ng pioneered by Robert Mondavi.
Leigon listed many new social media services unfamiliar to the audience, including those with geographic connections. He said that wine Tweetups at restaurants and stores are now far more effective than winemaker dinners, and Foursquare, which combines social media with GPS to tell people where you are, is very hot. So are QR codes on store displays, texting campaigns, and Grappos, which lets users find wines at retail.
Hahn has developed an “app” for smart phones, which Leigon regards as an important new development in communications.
A panel on mergers and acquisitions among wineries and distributors concluded that these will continue. Ray Chadwick, formerly of Diageo but now with Young’s Market, said that large spirits companies and public wine companies are sitting on the sidelines for now. Instead, privately held wine companies like Foley, Gallo, Delicato and The Wine Group are the best prospects, and private equity groups could be players for Foster’s wine group and Ste. Michelle if the latter is offered for sale.
He also said that wealthy individuals outside the industry “can’t be found.”
Chadwick also predicted the three-tier system of distribution will survive but will evolve. Lines will blur, particularly for the “fourth-tier,” importers. He also thinks consolidation will continue.
In the final talk, Jason Eckenroth of ShipCompliant reminded wineries that direct to consumer shipments account for only 1% of winery sales, but they’re important to smaller wineries. Yet few wineries are signed up yet; only 425 of the more than 6,000 wineries in WinesVinesDATA are registered to ship to more than 11 states. “There’s huge potential,” he said.
He concluded with the news that three states, Tennessee, Maine and Kansas opened up to direct shipments in the last year, while Massachusetts seems dead for now, with New Jersey still in play. And only one winery has qualified in Pennsylvania: There the law says you have to produce most of your wine in the state to participate but officials have told Eckenroth that provision isn’t enforced. Russian roulette with permits, anyone?
Many of the presentations are available at wineindustryfinancialsymposium.com, as are details on upcoming conferences.