Can Napa Wine Prices Stay Up?

Napa, Calif. -- Napa wines are typically expensive. Customers have stopped buying expensive wines. Does that mean Napa wineries need to cut prices?

The short answer is, "No." But short- or long-term reductions may make sense in some cases, according to experts at the Napa Valley Grapegrowers annual seminar, Ahead of the Curve, held yesterday at the new Westin Hotel in downtown Napa.

Moderator and grower Jim Verhey anticipated the tone of participants. "These are trying times," he acknowledged, a sentiment echoed repeatedly and underscored by the absence of one speaker, Bruce Herman of Foster's, who had flown to New York to fill in his new boss following extensive layoffs at the company.

After informative talks on macroeconomics by Bob Smiley, former dean of the business school at University of California; and on credit by Lindsay Wagner of American Farm Credit, Victoria Snyder of Foster's Wine Estate Americas emphasized the importance of the 15 to 30-year-old Millennials to wine's future, while not ignoring the boomers of age 45 to 60, wine's major customers at present. The in-between Generation Xers are sometimes called "slackers," a term that certainly describes to their wine consumption.

Seminar attendees, who included many vintners as well as growers, were reminded by outsiders that Napa Valley is unique in the U.S. wine business. Its vineyards far exceed those of other areas in their value, and that value seems to be continuing even while home prices fall. In addition, Napa wines garner premium prices.

On the other hand, consumers are trading down, notably from $40 to $100 wines such as the Cabernets that have been the heart of Napa Valley's reputation. That puts pressure on Napa wineries, but particularly on newcomers without strong track records. Many have invested heavily at record prices to buy land and facilities, and the wealth they used to follow their passion may have disappeared in the stock market crash.

"They try to capture their start-up costs in two years by copying the prices of well-established leaders," noted Michael Quinttus, president of Vintus Sales & Marketing.

Marian op de Haar of Fleming Steakhouse agreed. "The quality of Napa wines is there, but the pricing for newcomers isn't really flying."

Now they can't sell their wines. For many, the only answer is to cut prices, but the retailers and wholesalers on the panel emphasized that this isn't the only solution, and might not be the best one.

A panel of resellers from outside the Napa Valley probably made the most impact--and offered the best advice. Peter Chai, senior vice president of wine at retail chain Beverages and More, says people are trading down. Those who bought $40 to $45 wines (core Napa territory) are buying wines that cost $20 or even $10. Those who bought $10 wines may be dropping to $4. Collectors have vanished. "They're drinking their collections," said Steve Somers, VP wines for Charter Sunbelt Group.

On top of that, people are dining out less, and that, too, hurts more expensive wines. Marian op de Haar said, "People are coming in less often, and they're trading down." She said her customers still order as much wine, but at a lower price-point. Fleming pours 100 different wines by the glass, and they are priced so there's little reason to buy a bottle. That makes it easier for buyers to adjust. "They can treat themselves with a $20 glass instead of a $80 bottle." She added that patrons skip dessert, salad or appetizers, but not the wine or steak.

And while people are going out less, they're drinking less expensive wines at home, too. That's good news for club stores like Costco, noted Steve Somers, VP wines, for distributor Charter Sunbelt Group. This hurts wine retailers, even discounters like BevMo. "They grab wine at Safeway," Chai said.

Direct-to-consumer business is down as well, although though Victoria Snyder reported, "The Internet can be your friend." But it's challenging. "Talk to your customers and get them to promote your brands."

So what was the takeaway message to Napa wineries?

Chai offered the obvious advice: Give them a deal. "They won't buy the $100 wine unless they think they're getting a bargain."

Beyond that, many producers are trying short-term fixes that don't impact brand positioning, such as special offers for distributors, retailers and restaurants if allowed. Charmer Sunbelt once offered a subscription to Food & Wine Magazine with sales. The strategy didn't work before, but does now in these tight times.

Some people are still buying these wines, too, but it's important to locate them, not just go with scattershot promotion.

In addition, the speakers advised those with established reputations to stay the course. Snyder warned, "If your brand is known, this is a terrible time to change your packaging." Steve Somers added, "This isn't the time for second labels, either. Sell what's known."

There are some critical price-points, however. "Try to get wines in the $20's to under $20," Snyder suggested.

Most of all, the distributors and retailers told wineries to get out into the market. Winemakers and vintners should hit the road. Next week, for example, 100 Napa Valley wineries are going to New York City as part of a week-long Napa Valley Vintners' promotion. But Steve Somers also suggested going to secondary markets. In contrast to the largest markets, "If you visit South Carolina or Minneapolis, you're a rock star."

Still, the speakers warned that things may never be the same way again. "Life won't be the same," op de Haar cautioned.

"Napa isn't the only king anymore," Quinttus said. Customers find other wines they like. "This tastes better than that one, and costs half as much," they think. "You have a right to charge anything you want, but we have the right not to buy it."

Many wineries see the Millennials as the future, but they're not buying huge quantities of expensive wine yet. Instead, they see Napa wines as "their fathers'--or bosses'--wines." Op de Haar suggested a guerilla campaign to influence Millennials for another reason. "They don't eat in our restaurant unl ess they're with their parents, but they're the ones who serve you your food." She hinted that educating them makes a lot of sense, whether in person or via online methods. "The web is a way of life to them; it's not just a tool like it is to older people."

With all the concern about the prospects for their customers--the wineries--fortunately for the growers at the seminar, last year was a short year for production, and few growers are planting, which should help maintain grape prices as the economy recovers.

Fleming's op de Haar served up some humor with the serious insights. While offering advice to the growers and winemakers, she earned a big laugh when she commented: "Our concept is to be the Napa Valley of restaurants. If you find a solution, let me know."