02.25.2009  
 

Oregon Industry Expects Shakeout

Experts advise: Don't lower prices -- raise consumers' quality perception

 
by Peter Mitham
 
Oregon Wine Industry Symposium
 
Barbara Insel, Rob McMillan, Bill Hatcher and Robert Nicholson (from left) weighed in with their views about the impact of the current economy on Oregon wineries at the Oregon Wine Industry Symposium this week. Recovery could come as early as the second half of 2010, but many Oregon wineries will face challenging conditions until consumer demand picks up.
Photo credit: Peter Mitham
 
Eugene, Ore. -- The grim economy and its implications for the plethora of small wineries that have sprung up during the economic boom of recent years have been a key theme for the more than 800 participants at this year's Oregon Wine Industry Symposium.

More than a few gasps were heard during the symposium's opening session Monday night, when Rob McMillan of the wine division of California's Silicon Valley Bank flashed a slide of recent numbers from retail consultancy A.C. Nielsen showing that same-store sales fell at 22 of the country's top 25 eateries during the past year. A similar report at the end of 2007 had reported that 18 of those same 25 restaurants saw same-store sales grow.

The turnaround has significant implications for wineries, which have known for several months that restaurant wine sales were shrinking. The dramatic numbers McMillan presented reflect the depth of the retrenchment in U.S. household finances.

"I think it's time for everyone to become a bit more modest," said Barbara Insel, president and CEO of Stonebridge Research Group in Napa, Calif. While some consumers still have money to invest in their cellars, she forecast that the year ahead would be challenging as flagging demand among cautious consumers prevents rising inventories from selling as quickly.

"People are still buying, but they're buying more carefully," Insel said. She pointed out that consumers are boosting saving rates to levels not seen since the 1980s, a move that may be good for the long-term financial health of the nation, but which will challenge many young wineries in Oregon, where the industry has grown rapidly with its eyes on a super-premium niche.

While this year may be challenging, Insel believes the full brunt of the recession has yet to be felt. "Next year, I think, will be even tougher," she said.

Bill Hatcher, managing partner of A to Z Wineworks in Dundee, Ore., said the rapid growth of the industry in Oregon, coupled with the decline in consumer spending, means the state's winemakers are probably producing about twice what they can reasonably expect to sell. He expects private-label opportunities to become attractive to Oregon winemakers looking to monetize wine inventories.

It also means the next two years could see a shaking out of industry players, leaving stronger brands to enjoy a recovery widely expected to begin in late 2010. "These next few years aren't going to be fun," Hatcher said. "But I think we're going to have a very viable industry over the long term."

The long term itself may be a long time coming. McMillan believes the current crisis will present wineries with conditions more typical of the 1960s, '70s and '80s, well before the current expansion of the Oregon industry to its current tally of 395 wineries from just 176 in 2002. "It's a new paradigm," he said. "We have, probably, a decade of very subdued growth."

The challenges are prompting the Oregon Wine Board to increase its focus on enhancing members' management skills and the industry's resilience. OWB executive director Ted Farthing anticipates a tough two to three years for the industry. Still, presenting a report on future directions for the industry, he said that Oregon producers must be disciplined in their approach to marketing.

While discounting may help move product in the short term by putting cash in the hands of wineries, wine marketer Larry Lockshin of Australia's Ehrenberg-Bass Institute told growers they've got to focus on cultivating loyal customers rather than discounting.

Indeed, wines from Oregon may be priced higher than those from other areas, but Farthing believes savvy marketing should focus on Oregon wines attracting buyers who are trading down in the current climate rather than trading up. This allows wineries to attract new buyers without compromising prices.

The big challenge lies in boosting consumers' perception of Oregon wines, which an OWB survey indicates fall between California and Washington product when it comes to the opinion of wine consumers.

The survey found that 66% of "high-frequency, high-end" wine consumers believe California wine is a premium product and 56% believe the same of Washington state wines. The study found that 62% believe Oregon wine is a premium product. OWB efforts aim to boost that figure to 75% by 2015.
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