Economy unsettles grape growers and wine marketers

Fresno County winegrape grower Ryan Metzler examines one of the equipment displays that were part of the trade show that accompanied last week's Unified Wine and Grape Symposium at the Sacramento Convention Center. Symposium organizers were pleased with attendance of 11,700, only 200 fewer than last year despite the downturn in the economy.To gauge the mood of the wine business, consider the titles of three presentations from the "state of the industry" report at the Unified Wine and Grape Symposium last week in Sacramento:

"California's Grape Supply—Blessing or Curse."

"Brave New World."

"The Worst of Times, the Best of Times."

Recognized experts in California's winegrape sector outlined the impact of the global economic downturn, shifting consumption patterns and other factors that have unsettled the business during the past year.

Jim Anderson, president of SVB Analytics, a non-bank affiliate of Silicon Valley Bank, set the stage for the winegrape presentations with a less-than-optimistic report on the state of the world's economy, in which he predicted a slow recovery at best for the economy in the United States and abroad.

Nat DiBuduo came next and his "blessing or curse" presentation focused on three factors: the recession, consumer behavior and global supply.

DiBuduo, president of Allied Grape Growers in Fresno, noted that the 2009 winegrape crop in California was the largest since 2005 and may turn out to be the second largest in history. The major varieties experienced significantly higher production, led by large crops on the Central Coast and northern interior.

Although the wine market was mostly balanced going into the year, that changed quickly when the downturn in the economy prompted two significant changes in consumer buying habits, he said. One was the shift from dining in restaurants to dining at home, and the other was the tendency to start buying less expensive wines at retail.

"This changing consumer behavior negatively affected all segments of the wine industry, as inventories backed up and cash flows slowed at all levels," he said. "This had a trickle-down effect on growers and winemakers alike."

Glenn Proctor of the Ciatti Co. of San Rafael followed with his "Brave New World" presentation, in which he cautioned those attending the standing-room-only session that evolution is taking place within the global wine business and it is important for Californians to recognize it.

"When it comes to wine, we viewed California as separate and individual—better than the rest of the world. But the truth is that we are part of the global wine industry and if we are willing to face that truth I think we can be successful, but if we are not, we are going to live in the past," he said.

"What you have done in the past to be successful in your business may not work in this new world. The reality that you face when you wake up in the morning may be different that the reality that existed when you went to bed last night," he said. "The quicker we realize where we really stand, the quicker we can be competitive."

Most winegrapes produced in the San Joaquin Valley and along the Central Coast are machine harvested.Proctor pointed out that the major wine companies are less committed to conventional regions and more focused on price point, margins and consumer acceptance. At the same time, consumers are willing to accept wines from anywhere on the globe, but they are expecting more and better wine for less money.

Wine producers in other nations have targeted the United States for expanding their sales and they are ready to jump in quickly to fill any market gaps left by increasing prices and short supply, he said, adding that when these foreign suppliers take over these markets, it may be very difficult for California suppliers to get them back.

"There are many countries that have excess inventories of wine that they need to export in the global marketplace and they are very comfortable in doing that," he said.

Proctor used the example of Australian chardonnay. When the exchange rate favored Australia, California wineries sourced their grapes from local growers, but when the exchange rate shifted in favor of the United States, sales of California chardonnay grapes fell precipitously and imports of bulk chardonnay from Australia increased dramatically.

"The wheels have come off the bus and we can no longer look at our supply in isolation," he said. "Consumers will continue to drink California wine, but we can't take it for granted any more that we live in this isolated world and we can't be harmed, because that's not the real reality."

Proctor suggested that growers and wineries develop a two-fold strategy: survival in the short term and prosperity in the long term.

"For the last 25 years, we have viewed our industry as 'simple,' in that we thought we controlled our destiny via our own supply. But we have entered a complicated period where we are going to have to sort out the future," he said.

Proctor urged attendees to be proactive, to understand their prospects, to work with companies that understand the global marketplace and, above all, not to become complacent because "today's challenges are tomorrow's opportunities."

One way to avoid complacency is to re-examine cultural practices in order to boost yields.

"How can we develop a system where growers can make an adequate return per acre at the same time that wineries can make wine at a price point that will allow them to sell to the consumers? Is two tons or three tons to the acre the only way we can grow North Coast cabernet sauvignon? Could we produce six or seven tons, and what would it taste like and would consumers accept it? How do we make the model work? Now is the time for us to look at models and systems and adapt those changes to make ourselves competitive in this new environment," he said.

Jon Fredrikson of Gomberg-Fredrikson & Associates wrapped up the state of the industry presentation with an overview of the 2009 wine market, which he said was very challenging for many people in the California wine sector.

"Many people that I've talked with have said that this was the worst year in their history, it was a brutal time," he said. "It was really ugly in terms of being blindsided, especially by the sharp drop in consumer demand. On the other hand, it was really the best of times for seven big commercial producers who had the wine at the right price points, and several dozen small or medium-sized producers who were able to maneuver and still sell their products."

Fredrikson listed four developments that had a significant impact on the 2009 wine market: a "reset" of consumer demand, global outsourcing, distributor consolidation and global recession.

"I had no idea that the consumer demand reset would be as bad as it was. Global outsourcing also came on very big last year and distributor consolidation really came home in 2009, as distributors became so conservative with a very limited number of players that it really knocked out many small wineries. And finally, the global recession also hurt our exports," he said.

The change in consumer buying habits was particularly surprising, Fredrikson said.

"We all kind of assumed that things would go on as they had in the past. But it wasn't just wine, it was every luxury consumer product that was affected," he said.

He gave the example of the dramatic decline in lobster sales.

"I was shocked to see lobster selling for half the price of halibut because it was a delicacy that people tend to spring for when they've got money. Well, they didn't buy any lobster last year and all of a sudden there was a global surplus of lobster and you could buy lobster at big discounts," he said.

Fredrikson said he is beginning to see a turnaround in wine purchases, but it remains to be seen if consumers return to wines sold at premium prices.

"A lot of people are moving down to less expensive wines and are discovering that the wines are still pretty good. So they ask themselves if they really want to spend two or three times as much for better wine. That certainly is something that could change things, but it also will build consumption, and that is the long-term advantage of it," he said.