Consumers flock to cheaper wines

Wine may be an affordable luxury, but it’s the consumer who decides what’s affordable.

That’s the painful lesson many in California’s wine industry are learning as the recession sends demand for high-priced wines sliding while sales of wines under $6 have soared across the nation.

“It’s almost like people hit the reset button, and all of a sudden we’re back to 20 years ago where people are looking for wines under $10,” veteran wine industry analyst Jon Fredrikson said Tuesday.

In a speech at the annual Wine Industry Conference staged by the North Bay Business Journal, Fredrikson sketched in broad strokes a troubling trend for wineries selling high-end products.

The recession has caused people to eat out less, driving down wine sales at restaurants last year by about 10 percent, said Fredrikson, president of Woodside-based Gomberg, Fredrikson & Associates.

Fearful of being left with excess inventory, distributors, restaurants and retailers pulled back sharply on wine orders last fall, choosing instead to save money and work through existing wine inventories, he said. Wine warehouses on the North Coast saw shipments drop by as much as 19 percent last year.

“It’s no secret that lots of wineries suffered in terms of shipments last year,” Fredrikson said.

Total sales, he said, were still up. Nationally, U.S. consumers bought more wine than ever, uncorking 317 million cases. California shipments rose modestly as well, climbing 2 percent to 196.3 million cases, Fredrikson said.

But most of the growth came in the $3 to $6 per bottle category, representing a “massive switch down” to a segment Fredrikson called “economy and value wines.”

Wine sales at Walmart, for example, which sells a $2 wine called Oak Leaf Vineyards, soared 34 percent, Fredrikson said.

That’s bad news for wine companies in Sonoma and Napa, which have the greatest concentration of high-end wineries in the nation. Wine companies like Kendall-Jackson, Constellation Brands and others have been laying off workers as sales of high-end wines have slumped.

Luckily, the size of the North Coast grape crop in recent years has been relatively small, leaving wineries with less excess inventory than they might have otherwise.

“Thank goodness we’ve had a couple of light crops, because this could have been a lot uglier,” said Derek Benham, chief executive officer of Purple Wine Company in Graton.

Last year, the winery shipped less wine to distributors’ warehouses than distributors shipped to customers, called depletions.

“I’ve never had a year when depletions were more than we shipped,” Benham said. “That’s how unusual the last 12 months have been.”

Benham believes one of the reasons for the sharp reduction in orders was the fragility of the banking sector. With banks in such trouble, distributors and retailers didn’t want to risk being overstocked in an expensive item like wine, he said.

“They were not going to be caught in the New Year with anything that could be perceived as excess inventory,” Benham said.

The sharp drop in orders was a troubling event, Benham said. It caused wine inventory to back up at the winery, and left executives scratching their heads and losing sleep.

“It was a perplexing and nervous time for us,” Benham said.

When wine backs up in the warehouse, “it can cause a bad case of financial constipation,” Benham said.

Despite all these challenges, Benham noted that Fredrikson highlighted several positive forces working in the industry’s long-term favor.

Fredrikson did note that Americans still drink less wine, per adult, than people in many other parts of the world and consumption is rising. The U.S. market, at $30 billion in sales annually, is still the largest in the world. And small crops bode well for grape demand, Fredrikson said.

So while some wineries might be tempted to sell off excess inventory to improve the balance sheet, Benham cautioned against such a move. The fundamentals of the industry are very strong, and there is some evidence pent-up demand caused orders to surge in the first quarter, he said.

“It may seem prudent at the time, but it may seem rash in retrospect,” he said.

Money is also very cheap, he noted, for wineries with good relationships with their bankers. That can actually open up opportunities for expansion, said Benham, who founded Sonoma Wine Company, the county’s largest contract wine producer. Last month, Sonoma Wine expanded into Napa County with the acquisition of the custom crush arm of Greenfield Wine Co. in American Canyon.

Overall, Benham urged other winery executives to have faith that their industry will rebound and buyers will return.

“The good news for the wine industry is we’re making wine, not SUVs,” Benham said.