Pick your bad news:
• Cosentino Signature Wines, a 60,000 case winery in Napa Valley, defaulted on interest payments on an $18 million loan.
• The recession has brought sales of high-end Napa Valley red wine to a screeching halt, says one retailer.
• Layoffs have hit some of the wine industry’s biggest companies – Kendall Jackson, Brown-Forman (whose brands include Fezter and Sonona-Cutrer), and Diageo’s North American operation (Beaulieu and Sterling).
• U.S. wine sales in dollar terms were down in 2008 compared to 2007, and were mostly flat by the amount of wine sold – the first time either of those has happened since 1993.
Which means that everyone who hoped the wine business could slidestep through the recession was probably wrong. After the jump, why this matters and what it means to you:
I don’t write this to spread doom or gloom, or to say I told you so. Rather, it’s about understanding the problem, because that’s the only way to find a solution.
And there is a problem – a big one that is getting bigger, and one that the numbers only hint at. In 2008, U.S. wine sales rose just one percent, and that was with the first six months of the year being OK. Since the beginning of the year, wine sales have actually declined, with restaurant sales especially hard hit: depending on the survey, they may be down as much as 15 or 20 percent. Even wine competitions are hurting, with entries down 10 and 20 percent.
Over the last three months, wine and distribution types have told me that the situation is going to get worse before it gets better. (And it is much, much worse in Europe – a tip ‘o the Curmudgeon’s fedora to John Palazzo for sending this my way.)
• Many national and important regional retailers stopped buying wine before Christmas, and aren’t going to reorder until the warehouse is empty. Literally. That also goes for wines they don’t currently carry; one retailer told me that he isn’t even allowed to taste new wines.
• Winery warehouses are chock full, and this includes national brands that wouldn’t seem like they should be affected. One wine industry official told me that one of the most popular names in the world has seen sales drop 20 percent.
• All of this is causing a backup in the supply chain. Retailers should be stocking the 2007 red and 2008 white vintages this spring and summer. Instead, those wines are sitting in warehouses and could well be there when the 2008 red and 2009 whites are released next spring. And the warehouses will probably still be full when the 2009 red and 2010 whites are released in two years.
The result? Cash flow crises for an increasing number of wineries. If your wine isn’t on store shelves, you’re not being paid. And if you aren’t being paid, you can’t pay your bills. And we know what happens then. I wouldn’t be surprised, if the recession lasts through the middle of next year, to see some fairly important companies declare bankruptcy. At the very least, a bunch of brands are going to go away, and we’ll see mergers and consolidations at wine companies big and small.
Will all of this distress lower prices? Yes and no. Yes, because some retailers are slashing prices to reduce inventory, especially on some higher priced wines. (Though what happens when their shelves are empty is anyone’s guess.) And I’m seeing an increasing number of retailers selling off-name brands and older vintages at much reduced prices, stuff they have picked up when distributors empty their warehouses. The catch here, of course, is that that $3 bottle of 2005 cabernet sauvignon wasn’t made to sit on a store shelf for four years, and who knows what it will taste like.
The bad news is that many wines won’t be cheaper. There’s a huge, enormous fixed cost for U.S. wine, and that’s the price of real estate. Prices may have collapsed for California residential land, but they haven’t for grape land. So producers don’t necessarily have any wiggle room to cut prices – until they chapter out, of course, and the bank makes the decision for them.
A gloomy scenario? Perhaps. But it may also restore some sort of rationality to the wine business, which has been decidedly irrational during the boom years of this decade. And the biggest winner then? You and I, because we’ll get quality wines at a fair price.
For more on the recession and the wine business:
I have also noticed wineries offering free shipping more and more frequently. I assume in an effort to generate sales and some cash flow.
Posted by: KristinL | April 27, 2009 at 11:08 AM
Many wineries, even decent sized ones, can't get their products out of warehouses on to store shelves. So they have to try and move product anyway they can, which includes direct sales.
Your point is a good one. When wineries and the Internet retailers like wine.com offer shipping specials (wine.com is doing $49 for a year's worth of shipping, which is about the normal cost of shipping two cases), something is up.
Posted by: Jeff Siegel | April 27, 2009 at 02:02 PM