This is the first of two parts looking at wine prices and consumption this year, and how they will affect those of us who drink cheap wine. Part II, which with my take on the situation, is here.
It isn’t very surprising, given the economic doom and gloom around us, that wine prices and consumption will shrink this year. What is surprising is that most of the people I talked to don’t expect wine to suffer as badly as housing, the stock market or any of the other parts of the economy that have collapsed since last summer.
Their thoughts: First, that we’ll will drink less expensive wine, but not appreciably less expensive. This is what the business calls trading down. Second, consumption probably won’t decrease, although sales might – since we’re drinking less expensive wine. Third, prices for imported wine, and especially French wine, will decrease slightly, and we should see that by the second half of the year. Fourth, there will be a shakeout among producers, mostly but not limited to Australia and California. Low-end wineries will go out of business Down Under, while we’ll see California wineries making $35 and up wine close.
In this, so far, the numbers bear out their predictions. The Wine Market Council, an industry trade group, says sales gained 1.5 percent in 2008, compared to an earlier projection of 2.1 percent. Not bad, certainly, but is it the entire picture? Maybe, maybe not. I’ll offer my thoughts on Monday.
Consumption matters because it affects prices. If consumption drops, so will prices, as supply and demand work its magic. Consumption could drop because we’re switching to beer, which is less expensive. It could drop because we order a glass instead of a bottle at a restaurant. Or we could eat at home more often, where many of us don’t drink wine, instead of going out, where we do. And we could just cut back because we can’t afford wine.
“There is not going to be a huge drop in consumption,” says Robert Smiley, professor and director of wine studies in the UC Davis Graduate School of Management, who probably knows as much about this stuff as anyone. “I think the $12 and up category is going to hurt a little more, because people are going to trade down and they’re going to eat out less. But unless the economy really goes into a tailspin, there won’t be a big drop.”
The first casualty will be wine around $15, which has been the fast growing price category over the past several years. We’re already seeing anecdotal evidence of this, as my pal Alfonso Cevola has noted: “They wanted to send palate after palate of overpriced wine into already bulging warehouses. As if they have been taking a siesta these last six months and think things are just as they have been. Business as usual. What a rude awakening they are in for.”
And the numbers are starting to look that way, too. In December, wines priced above $11 lost dollar share, and wines priced $5-$7.99 also lost share. Boxed wine gained share along with wines priced below $5 and wines priced between $8 and $10.99. Or, as one headline put it: “$10 wine is the new $100 wine.”
The key for producers, says Bill Terlato, the president and CEO of Terlato Wine Group and Terlato Wines International, is not to panic. He says some cult wines, which never had a reason to exist other to get high scores, will disappear. They’ll be victims of consumers trading down and their own finances, which were based on getting $100 a bottle for their product.
Terlato says he is already seeing some high-end producers dumping their product to generate cash. And some analysts are warning high-end producers and growers to prepare for up to 18 months of bad times, with fewer lenders lenders willing to finance cult efforts.
Two other points for those of us who care about cheap wine: First, Terlato says we will see better prices for imports, and especially French wine, later this year. It will take about six months to work through the inventory that was bought with weaker dollars. Second, Smiley says to expect dull, unimaginative wine lists as long as the recession lasts. Restaurateurs, facing a cutback in wine consumption and traffic, will stick with wines they know people will buy and won’t take any chances.
Part II: Is this all, or will there be more serious ramifications?
Great post, Jeff. I am looking forward to reading part 2 of your trend article....
Posted by: Amy | January 23, 2009 at 01:16 PM