Wine & Grape Symposium murmurs
Excise tax could weaken one segment of the industry that’s still doing well
Sacramento — It’s all the talk at the annual Unified Wine & Grape Symposium: A proposed excise tax that could hurt the wine business at a time when business for many wineries is already weak — and it would have the most impact on the one part of the industry that is still doing well.
Gov. Arnold Schwarzenegger has proposed a “nickel a glass” tax, which sounds reasonable until you look at it closely.
The present tax on a gallon of wine is 20 cents. Under the governor’s proposal, it would increase to $1.28 per gallon, a 640 percent rise.
That would be $3.04 per case paid by the winery, but that amount would be doubled by the markups usual in the retail channel, amounting to $6.08 per case.
At restaurants, it would be tripled to $9.12 per case.
That’s a dollar a bottle. That amount isn’t that big a deal for higher end wines, but those are the ones that are suffering most in the recession, and it would be a large blow to moderate-priced and cheaper wines, that are doing well now.
A bottle of Two Buck Chuck, for example, would become $2.29 Chuck or $2.49 Chuck according to Fred Franzia, president of its producer, Bronco Wines.
The tax on a three-liter box of wine, an increasingly popular format for quality wines, would rise a dollar at the producer level, and about $3 at the store. That’s a large increase for a wine that sells for $8 to $20.
Jon Fredrikson, the respected wine market analyst who was given the grim task of discussing today’s consumer market at the best-attended session at the Unified show, pointed out that the state gets only about one third of this overall increase in the cost of a bottle of wine. The rest goes to distributors and resellers who would benefit at the expense of wine producers and grape growers.
An increase of this magnitude is sure to dampen sales. Fredrikson says the average bottle would increase up to 25 percent (given that 60 percent of California wines cost less than $7 at retail), 45 percent for a 4-liter box or 56 percent for a 5-liter box.
If the new tax were collected at retail — which would be unprecedented; only gasoline excise taxes are added in at retail — it would merit less and the state would get all the money.
More significantly, wine producers ask, why should one product be targeted, especially California’s signature product? A small increase in the sales tax could collect far more revenue.
High-end considerations
For high-end producers like many in Napa, the proposed excise tax isn’t a big issue; weak sales are.
Three wine companies represent almost 60 percent of California’s total shipments (Gallo, the Wine Group and Constellation). The top 10 account for more than 80 percent. They sell a lot of moderate-priced and inexpensive wine, although they also sell more expensive products like Robert Mondavi and Franciscan.
Fredrikson says that wineries selling more expensive wines typically sell most of their products through restaurants, and restaurant sales have been hard hit by the economic downtown. The plummeting stock market, business cutbacks in travel and entertainments, rising gas prices and consumer worries all have contributed, he says.
He says that a majority of restaurant operators reported lower same-store sales from a year ago in November, and nearly one-half expect further declines. As a result, restaurants cut 104,000 jobs during the second half of 2008.
Distributors, restaurants and stores are also trimming inventory, which reduces sales, too. Locally, this can be tracked by shipments from wine warehouses, which are down dramatically in Napa and Sonoma.
Nationwide, restaurants say wine sales dropped 10 to 12 percent in 2008.
Consumers are reducing expenditures. Aside from eating out less, they’re ordering cheaper wines — or none at all.
Many Napa restaurants, including some of its best-known, are waiving corkage some nights — or even dropping it completely — to attract diners. “Frugality has become hip,” Frederickson says.
As a result, this year, wineries well-positioned in the value wine market are winners.
Each year at Unified, Fredrikson picks a winery of the year, usually a smaller producer that has made unusual impact. This year, the three finalists make a lot of inexpensive wines: Bronco Wine Company, the Wine Group and E & J Gallo (which owns higher-end Martini and William Hill in Napa Valley).
He chose Gallo, an unpopular choice among the crowd of mostly small winemakers in the crowd, but a company very well positioned to prosper in tough times.
How long will the bad times last? No one knows and few were willing to speculate. The most optimistic says next spring; the pessimists five years.