Wine prices in 2012

Consumers have been able to walk into wine stores over the past four years and find terrific bargains -- displays of 2 for $10 and 3 for $20 wines that were well made and worth drinking, bins of marked down and discounted wines, and $40 wines that cost $20. Sadly, though, that all may be about to end.

Wine prices look like they're finally firming after four years of recession-induced declines. The changes are still tentative, they don't necessairly hold true for all parts of the business, and they may not be as noticeable in some parts of the country as in others. In this, it doesn't look like prices will be higher as much as the obvious discounting will end. But, after interviews with retailers, wholesalers, wineries and analysts, it doesn't look like $10 wine is the new $100 wine any more. Instead, there's a new paradigm: The search for value.

"Wine drinkers are going to have to look harder and wider to find deep deals on known items," says Christian Miller of California's Full Glass Research, who tracks wine prices and consumption. "There will still be values, but they won't be as easy to find. They're going to be in undiscovered wines."

After the jump, why this is happening and what it means:

The most important factor in the new pricing is the supply of grapes, and especially grapes from California, which drive the U.S. market. The last couple of California harvests have been plentiful, but not record-setting, and that has meant higher grape prices. And that means, eventually, higher wine prices. This has been evident in what the industry calls the bulk market. Winemakers who need to buy grapes because they don't have enough of their own report significantly higher prices on the bulk market than just a couple of years ago.

The other key is consumer demand, which didn't decrease during the recession (we bought less expensive wine instead). If demand increases as the economy improves, and there are indications that it might, that will send prices higher as well. One factor affecting demand is the growth in sweet wine, and especially sweet red wine. If this takes off, and Miller says informal surveys with winemakers last year showed that it might, it could increase demand further.

So what are the immediate consequences of fewer grapes and increased demand?

• The beginning of the end for what are known as opportunity wines, which sold for $10 to $15 over the past couple of years, often as private label wines. They were usually great values, and included brands like the Cameron Hughes Lot wines. Opportunity wines are only made when there is an opportunity to make them -- an oversupply of cheap, quality grapes on the bulk market or grapes that exisiting wineries don't use and re-sell for pennies on the dollar. The loss of opportunity wines will not only eliminate one source of quality cheap wine, but reduce pricing pressure on exisiting wines.

• The end of new ultra-cheap wines. The recession was a boom time for wine that cost $6 or less a bottle -- the Barefoots, Two-buck Chucks, and the like. Barefoot sales alone rose 23 percent in the 12 months ending in November. Higher grape prices, says Miller, make it almost impossible to make money with these wines, so new producers probably won't enter this market.

• The re-emergence of the $20-$30 wine market, which pretty much went away during the recession; sales figures over the past year or so back this up. This is the part of the market that gets retailers and wholesalers excited, since these wines have higher margins than less expensive wines.

• The end, finally, of the backlog of past vintages sitting in winery and distributor warehouses. Several retailers told me that they have finally sold most of these wines, which had been heavily discounted. The end of the backlog means not only the end of this heavy discounting, but another reduction in pricing pressure on current wines.

The kicker in all this is the consumer. Did wine drinkers learn, when they traded down during the recession, that they didn't need to buy expensive wine to find quality? "That's the $60 million question," says Miller.

If they didn't, then the pre-recession foolishness could return, with consumers chasing wines based purely on cost. If they did, and I'd like to think they did (call it the romantic in me), then the industry's next business model will need to be based on quality and value and not just cost -- whether high or low. One reason why I'm optimistic about this? Miller says wine drinkers are more sophisticated than they were four years ago, more willing to try different kinds of wines made in different places. Which is very good news for those of us who care about wine.

Comments

[AC]

The short answer is: wine prices will continue to go up. Wine prices will fall.

For those producers who think they can get away with it, they will (and are) raising prices.

For those products in heavy inventory, as has been the case for years, they will be closed out, discounted. Around 5-10% of all inventory is in that boat, good economy or bad. It's often worse during up-cycles, but because folks are in a "good mood" they don't always want to buy discounted products; it brings them down. But when the market cycle is at low points, then those same folks forget about their pride and buy cheap wine.

Experience and observations over the last several decades causes me to say this.

[Jeff Siegel]

"But when the market cycle is at low points, then those same folks forget about their pride and buy cheap wine."

AC, why do you write so many things, like this, that I wish I had written?

[Alfonso]

ever since I got off of dark roast coffee, it's been this way...

Chapeau , mon ami!

[VintageTexas]

Hopefully the higher prices for CA grapes will have an impact on wineries in the Other46 states that are using CA grape for making Appellation-less wine labeled "For Sale in (insert your state's name) Only" or wines of American Appellation.

It might also indicate that it might be a good time to plant more wine grapes in TXm VA, MO, MD, CO, etc. and let market forces work in your favor.

Russ
http://vintagetexas.com