Like with everything, wine consumers turn cautious

(Note: This article was originally published in the December 15, 2008 issue of the Wine Industry Business Journal.)

NORTH COAST – Wine industry experts are comparing this year to 2001, when a recession trimmed restaurant spending then the U.S. economy halted for a few weeks following the terrorist attacks in September.

“We’re in a 9-11 mode, where people are hunkering down a little,” said David Freed, chairman of the Napa-based UCC Group, whose investments include hundreds of acres of vineyards in the Central Coast and North Coast.

Then, like sales data suggests now, consumers are still buying wine, but opting for lower-priced options to consume at home.

 Sales in restaurants have been slowing throughout this year, hampered first by soaring fuel prices and then by an onslaught of bad economic news in late summer. On-premise wine sales nationwide so far this year have ebbed 12 percent to 15 percent from where they were last year, according to market information gathered by Gomberg Fredrikson & Associates in Woodside.

“It’s very clear that consumers have reined in spending since late summer and in September-October really moved toward value wines,” Jon Fredrikson said. “Wine has not gone off the cliff, but there is certainly a change in direction.”

Consumers have been shifting to buying wine and food in stores for consumption at home, according to The Nielsen Co. In a figure that surprised some market analysts, wine had the fourth-highest amount of volume sales in October, up 7.1 percent from a year ago, according to Nielsen analysis of store scan data.

One of the fastest-growing wine sales segments now are wines retailing for less than $15 a bottle, particularly less than $7 a bottle.

This shift is reflected somewhat in a new Napa Valley Vintners trade association poll of its 330 members on results from October wholesale and direct-to-consumer sales compared with 12 months prior. Of the mix of 60 small, medium and large producers that responded, 42 percent said sales through distribution increased, 22 percent indicated no growth and 36 percent pointed to slippage.

“Everyone noted that inventories at wholesalers were very tight, so to be up or flat is good, given the situation,” said association spokesman Terry Hall.

Thirty-two percent had reported September wholesale results were lower than a year before.

By comparison, 63 percent of the wineries polled said October sales from tasting rooms, wine clubs and other direct channels increased, while 23 percent said sales were the same and 17 percent noted a decrease.

Because of a slowdown in restaurant wine sales and some $100-plus wines in shops, trade buyers increasingly are making more frequent but smaller orders, according to Tom Pillsbury, director of California marketing for the

Estates Group of distributor Young’s Market.

“In these economic times, watching inventory is more important than ever,” Mr. Pillsbury said.

What’s different about the wine market now from 2001 is the tight supply of winegrapes and wine for bulk sale. At that time, demand stalled just after a few years of booming production and a huge 2000 harvest left wineries with a worldwide ocean of wine. Scant new vineyard plantings and lower-priced negociant brands sucked up the excess through last year, and the 2008 harvest appears to be about 15 percent below expectations.

Mr. Freed said that grape-buying inquiries his group gets in late January are coming now. He awaits information in January on winery demand for bulk wine to gauge the depth of demand for grapes in 2009.

A lack of liquidity in financial markets is affecting the capital-intensive wine business, according to Rob McMillan, founder of Silicon Valley Bank’s St. Helena-based fine wine practice. He said he’s received a half-dozen calls from vintners who had capital projects in progress that were backed by financial markets.

“The wine business will survive better than most on average, but it will be sharing in the pain of a consumer spending downturn, and specific business models will suffer,” Mr. McMillan said.

The need to foster even stronger personal connections with consumers is reflected in the Napa Valley Vintners poll.