Experts warn of looming premium-grape oversupply as consumers adjust to economy

SANTA ROSA, Jan. 20, 2009 -- Changes in consumer discretionary spending hasn't crushed the market for higher-end wine, but local growers of the premium grapes that go into such brands need to be prepared for up to a year and a half of squeezed finances as consumers seek bargains, wineries squeeze their inventories to cut costs and a smaller pool of lenders press borrowers harder on their fiscal wherewithal, according to experts at an annual Sonoma County winegrape market forecast in Santa Rosa today.

Amid "stunning growth" in U.S. wine consumption last year -- reaching three gallons per drinking-aged adult in a recent Wine Market Council projection -- economic worries have prompted consumers to adjust their wine-buying behavior to the point that the looming shortage of premium grapes early last year could turn into an oversupply if the trend continues through the first half of this year, according to Glenn Proctor, a partner in bulk-wine and grape dealer Ciatti Brokerage of Novato.

"At the premium end there is a potential oversupply, and at the value end there is a potential undersupply," he said.

He was on a panel of industry experts addressing a gathering of viticulture professionals at the Sonoma County Winegrape Commission's 18th annual Dollars & Sense Seminar and Tradeshow, held at the Wells Fargo Center for the Arts.

The early and brisk winegrape buying activity North Coast growers enjoyed in late 2007 and early 2008 tapered off at mid-year as wineries started noting changing consumer buying patterns -- eating out less and opting to buy more bottles of less-expensive wine to consume at home -- first as gasoline prices approached $5 a gallon and then with the credit crisis in the fall, according to Mr. Proctor.

The brokerage estimates the 2008 winegrape crop statewide amounted to 2.8 million to 3.0 million tons. The state, which is set to release preliminary figures early next month, estimates crop size was 3.4 million tons, compared with the record 2005 harvest of 3.76 million tons.

"The 2.8 million tons in the state last year felt like 3.6 million tons," Mr. Proctor said about the grape-selling environment in the latter half of 2008. "Wineries said they were seeing sales down 20 percent to 30 percent."

Likening the market for North Coast grapes to a dam, Mr. Proctor said some "cracks" appear to be developing and could widen if the economy worsens. He noted that some "virtual vintners," or wine producers without significant or any facilities, bought grapes or bulk wine for higher-end, medium-size-production wines that aren't selling, and those vintners are backing off on their purchases or putting the bulk wine back on the market.

A related early indication of a "crack" Mr. Proctor pointed out was a weakening in short-term, or spot-market, pricing for Napa County cabernet sauvignon grapes amid slower sales at lower prices for many brands, though well-known brands are faring better.

Wines retailing for $10 to $20 a bottle will be the most active higher-end category this year, according to panelist Tom Pillsbury, vice president and director of marketing for the premium-oriented Estates Group of large alcoholic beverage distributor Young's Market.

Referencing late 2008 store scan data from The Nielsen Co., he noted how sales of wines retailing for more than $20 a bottle decreased 4 percent in revenue and 7.6 percent in volume, while wine sales overall increased. By winegrape variety on the label, Nielsen found that sales decreased 14 percent in that period for cabernet sauvignon, 26 percent for merlot and 1.5 percent for sauvignon blanc but increased 2 percent for zinfandel.

"It's now chic to be cheap," Mr. Pillsbury said, noting reports that consumers are paying down credit cards and shopping for deals.

This consumer behavior likely will lead to consolidation among restaurant operators and further contraction in the already scant number of distributors, he predicted.

The good news is a lack of new planting of vineyards plus recent weather-reduced crop sizes improves the long-term prospects for North Coast winegrapes and brands, according to Mr. Proctor. Only 3 percent of the 58,000 acres of vineyards in the North Coast haven't come into commercially viable production, the lowest proportion for any winegrowing region in the state. Five percent of vineyard acreage being nonbearing is considered adequate to replace the estimated 5 percent taken out of production for replanting, grafting or other operations. The nonbearing proportion was 20 percent in 2002 following the wave of North Coast vineyard planting in the late 1990s.

Top limiting factors for new North Coast planting are the price of grapes, which Mr. Proctor said has been recovering for leading varieties in recent years, and the price of land.

The latter can range from $40,000 to $52,500 per plantable acre in Alexander, Dry Creek and Sonoma valleys or $75,000 to $85,000 per vineyard acre, according to a survey of appraisers related by panelist Alex Klein of American AgCredit. In Russian River Valley and Sonoma Coast, prime areas for growing the still-hot-seller pinot noir, plantable land could be worth $50,000 to $80,000 an acre or $90,000 to $150,000 for vineyard acres, particularly planted to pinot noir. Land with a home could be worth up to $1.5 million, and hillside parcels could go for $1.5 million to $2 million.

A challenge, Mr. Pillsbury noted, for local growers will be factoring those kinds of costs in wines aimed at burgeoning by-the-glass programs when restaurant owners are looking for wines retailing for less than $10 a bottle.

For at least the next six to 12 months, local growers should go into "survival" mode, in once sense legally buttressing themselves against slow-paying grape buyers and in another sense working with cash-strapped buyers with whom they likely will be doing business long-term, according to Mr. Proctor and Mr. Klein.

"Cash flow is the driver for everything right now," Mr. Klein told the audience.

Because of limited liquidity in the overall economy, banks that have money are looking for borrowers to have adequate working capital to ride through crimps in cash flow or can tap the equity of their assets.

Other conditions for lending include lower loan-to-value ratios, financial covenants, fees for unused commitments in lines of credit, budgets that account for savings from advance purchases of fuel or steel and closer involvement of ownership in day-to-day management of the operation.