The recession continues to pummel the wine business. Or, as wine business consultant Christian Miller of Full Glass Research told me recently: “I don’t think the wine business is in denial. The differences have been too dramatic.”
At the beginning of the year, I wrote that that experts who predicted a mild slump may be in for a surprise. And, in fact, says Miller, they mostly were surprised.
“There’s been a total meltdown in the restaurant business,” he says, “and a severe drop in high-end wines that cost more than $30. And there has been a significant shift in sales between what’s selling and what’s not.”
What’s selling is cheap wine — so much cheap wine, in fact, that although total dollar sales for the year are expected to be down as much five percent (depending on whose study you believe), the total amount sold looks to be flat or even up a tiny bit.
Or, as Miller put it, “a radically different environment than just three years ago.” More, after the jump:
What has changed so radically in three years?
The most obvious difference is in the restaurant business. Sales are down about 7 percent this year and are expected to decline about 2 1/2 percent next year, and the numbers are even worse for high-end restaurants. And that means that the hundreds of wine brands that tied their marketing and distribution to the restaurant business are suffering as well. Typically, wineries sell their wines through retailers and restaurants. But some brands, in order to increase their cachet, made conscious efforts to sell only through restaurants over the last decade. Which, as Miller told me, worked well in the short term but isn’t working so well now. Some smaller high-end wineries have already failed, and more — and even some better known names — are expected to fail over the next 18 months.
The other change, of course, is the shift to cheap wines. Miller calls $20 “the real Berlin Wall” in terms of price, with some life left in the market between $20 and $30 and almost no life left in the $30 and up market. This is markedly different from what most analysts expected at the beginning of the year, when they foresaw some shift to cheaper wines but saw more resiliency at $30 and up.
Ironically, this does not mean wine will become any cheaper — either in restaurants or at retailers — over the long term. The dollar, which rallied earlier this year, is once again approaching the near record lows it reached in 2008. This means all imported wine will be more expensive, regardless of what happens to consumption. An Australian producer told me last week that he can hold the line on prices at the current exchange rate, which is about 75 Australian cents to the U.S. dollar, but if it gets much higher, he’s in trouble. The Aussie dollar approached 97 cents in 2008, and was as low as 47 cents at the beginning of the decade.
The other reason prices won’t decline is that the oversupply of grapes in California, which should lower prices, isn’t really an oversupply. It’s a function of the weak market. There aren’t too many grapes, as total sales demonstrate. There are too many grapes that can’t find a home, as Miller describes it. All that is happening is that high-end producers aren’t buying grapes, so that their grapes will end up being sold to lower-end producers at a lower price. All that will happen is we’ll see more cheap wine labels, which will replace the more expensive wines.
Grape prices might decline in the short term (and cheap wine quality will improve), but probably no longer than that. No one is planting more grapes, and the amount of grapes under production has remained consistent over the past several years.