Sales revenue recently jumped more than 5% at Willamette Valley Vineyards, but costs pushed down gross profits and net income by a whopping 30.9%, mirroring the rise in costs across the industry in the Northwest.
—With grapegrowers and wineries in Oregon preparing for the annual Oregon Wine Industry Symposium from Feb. 21-23, the latest snapshot
of the industry’s economic health from Northwest Farm Credit Services
indicates that wineries are courting more confident consumers. An informal poll in late 2010 of small to mid-sized wineries in Oregon and Washington state found 13.1% growth in sales of wine by the wineries surveyed during the third quarter of 2010 vs. the same quarter of 2009.
The strongest growth was in wines fetching more than $20 per bottle, a 16.6% increase. A similar trend was emerging for the year as a whole, with nine-month sales to the end of September 2010 rising 11.4% to $50.6 million, up from $45.4 million in the same period of 2009.
"Consumers are feeling more confident about their spending than one year ago, which has resulted in increased consumption," the report noted. Whether the sales are enough to carry Oregon’s wineries forward is another question, however.
Many wineries indicated that incentives, a shift by consumers into cheaper wines and direct-to-consumer sales drove the gains. While the rising dollar value of sales was positive, downward pressure on prices and higher cost for sales are hitting Northwest wineries hard. "A preliminary review of 2010 financials for a number of wineries indicates that, while revenues may be up in 2010, profit margins will be smaller due to ongoing pricing pressure," the report stated.
Sales up, net income down
This is underscored in the most recent quarterly report from publicly traded, 130,000-case Willamette Valley Vineyards Inc.
, where sales revenue in the three months ended Sept. 30, 2010, increased 5.5% over the same quarter a year earlier, topping $4.6 million, but cost of those sales pushed down gross profits 7.4% and net income by a whopping 30.9%.
A statement included with the quarter’s financials attributed the decrease to the "higher cost of goods relative to prices received." While winery founder and president Jim Bernau
was optimistic about the economy, he acknowledged that margins were being squeezed. "The economy is showing signs of life, evidenced by our higher revenues. Now, we just need to work through some high cost of goods to get back to historical gross margins," he said in a statement.
The majority of the Oregon industry may find it takes some time, however, said Kurt Wittman
, a vice president with Northwest Farm Credit. A short crop in 2010, combined with above-average labor costs, will conspire to keep margins thin while the current vintage works its way through the market.
“When you have a small-yielding crop, you have fewer units to spread your fixed costs over,” he told Wines & Vines
. "If you're sitting on this wine for one, two or three years, those thin margins don’t show up till some time downstream."
Moreover, a conservative attitude among consumers will persist, keeping value brands in favor as the darkest days of the recession slip into the past. Growers will ultimately bear the brunt of this shift.
Dealing with new market dynamic
"The main players are reacting to this new market dynamic by creating new labels at more moderate prices, so there’s this kind of one-time realignment of (costs)," Wittman said. "The pressure in the short-term is probably going to some degree to be on the winery, but to a large degree on the vineyard, because everybody’s trying to source fruit at a lower cost.…There’s a realignment of cost to make that $20 bottle profitable."
of Portland has encountered the scenario first-hand with production of its sub-$15-per-bottle négociant wines. Participating winemaker Anne Hubatch
said these bottles tap bulk wine in a market where fruit prices are still high. "The bulk wine is still showing cheaper than the fruit. It seems the cost of the grapes has not come down as much as the bulk wine," she told Wines & Vines last fall
Wittman said the price of fruit is going to challenge some of the newer labels with narrower margins until prices come in line with what consumers are willing to pay, but it’s ultimately growers who are going to foot the bill for the retrenchment taking place.
“The pressure is going to come back to the vineyards—those that don’t have good contracts or good quality fruit are going to struggle,” Wittman said. “They might get rid of their grapes, but they’re going to struggle from a pricing standpoint.”
And selling isn't necessarily an option when vineyard prices are higher than what buyers are offering. Growers and wineries will be able to explore strategies to address the challenges at the Oregon Wine Industry Symposium and other springtime events in southern Oregon.
OWIS will feature the grower-oriented session, Questioning the Norm Amidst Economic and Climatic Changes in the Vineyard, which promises growers information regarding vineyard changes that address "shifting climatic enviro nments while keeping in mind production economics and fruit quality."
Several sessions will address consumer behavior and marketing, including panel discussions focusing on "How Consumers and Their Purchase Drivers are Changing" and reports on the financial and bulk wine markets. "Sell Smarter, Not Harder," will offer a panel discussion of customer-relationship management practices.