The supply puzzle: Experts weigh in on how a shortage will impact industry(2)
Steve Smit: It’s fairly uniform across all pricing tiers. Certainly in the popular pricing segments and going all the way up to luxury tiers, there is a similar pattern in terms of wineries getting imbalanced in their inventories and seeing growth in volume sales. It’s a healthy thing. We’re growing.
Luxury tier less of factor in resulting bottle price?: true but I was talking availability of supply across tiers. Not as great as make it out to be unless in super luxury. Availability of supply is pretty uniform across all tiers. There’s not an excess of grapes for any particular product. Heath of demand is in our view pretty uniform across all tiers.
Joe Ciatti: It has an effect on everybody because the price is going up in every sector. But it has less impact on the high-end wines. Generally, any bottle price of $10 or below isn’t appellation-driven; it’s pretty much California appellation. If such a wine is appellation-driven, it will become California-sourced. Wines in $7 range will go overseas for supply.
Imports really affect wines $10 or below. We will see 30 percent to 40 percent of U.S. wine sales from imports instead of the 30 percent now. If a U.S. brand is appellation-driven and retailing for $12-$18 or more, consumers will pay more for the wines because they like the labels and won’t look for overseas brands.
The higher the price of the wine — really, for $30-$50 wines and above — the less the percentage of grape prices to the cost normally impacts the program. There’s a little more elasticity in the high end, and people can afford to pay more for grapes than for wines retailing in teens or below.
Some say there is a substantial amount of wine in winery tanks that will become available for sale in bulk, easing supply and price concerns. How true is that?
Jeffrey O’Neill: If there are large bulk suppliers holding big stashes of bulk inventories, they are clearly the smartest guys in the business. With bulk pricing up 30 percent to 50 percent, it is highly likely they would have already shown their hand.
Bill Pauli: Current supply and cost of grapes are a major part of bottle price and per-case costs. But all component costs, from winemaking to finished goods, are increasing. This impacts our margins. The marketplace — consumption — and the economy will determine final outcomes.
In a shorter timeframe, additional supplies will become available if bulk wine prices rise to unreasonable levels. It will be a tough call for wineries that need cash and profits in the short term but also are concerned about sales projections and growth to support their brands. Question is, will they be able to replace supply two to four years out and at what costs?
Steve Smit: There could be. Some, potentially, may be holding out on selling on the bulk market because they think the price will go higher, but that is a gamble.
Initial casts on 2012 cluster counts for vines [with shoots] that are out far enough to count is very positive. There was a sense of gloom and doom with the cool season last year that the crop would be small this year, but it looks good. We see that, particularly, in the Central Valley and Central Coast, where the vines are out farther.
Joe Ciatti: If people think there are two or three major producers hoarding wine, it’s wishful thinking. I don’t think that’s there.
In these types of constrained supply situations, people get carried away with pricing. People say they used to sell chardonnay for $10 a gallon and now they want $13, $16 or $18. Where’s the top? People are throwing things out there to see where top is.
For bulk Napa Valley cabernet sauvignon wine being marketed as high as $40 a gallon, if someone paid $5,000 a ton for very high-end grapes and factor in processing costs, you can get to that kind of price. Some producers with wine on the market will drop prices this year because it’s not selling.
On the casegoods side, many people now are saying they will not do a second label, control label or one for a store like Costco or BevMo. We will see a lot changes in how to adjust inventory. Smart producers should be raising prices now, if they have valuable wine in inventory from the 2009 through 2011 crops.
It’s been 12 years since this happened before, and a lot people in the business now have not seen this.
How could vineyard practices to prepare for a potentially large 2012 crop affect supply?
Jeffrey O’Neill: The industry could use a large 2012 crop. Two of the last three years were sizable crops, and we are not able to keep up with demand.
There is substantial planting going on, although right now it lags because of the availability of wood [nursery stock], but it appears the next two to three years will be tight on inventory.
However, a banker told me the other day, “There is not enough land in California to keep up with grape demand.” This, of course, is complete hogwash. It was proved wrong in the late ’70s, early ’90s and a surplus that is just subsiding in 2012. Growers will always find a way to grow more grapes.
Steve Smit: If anything, growers want to be sure they will have grapes to sell and will be more than happy to thin the crop, rather than not have enough. In all parts of California, including the North Coast, growers are leaving more wood [on the vine after pruning]. Our targets are in terms of quality, and that’s foremost in our minds. We want to ensure we get a decent crop, but quality parameters still need to be met.
Joe Ciatti: We will see some of that happen. I don’t think in quality areas wineries will give up quality for yields. There are a lot of wineries under grape contracts that didn’t want as many grapes in the last two to three years and had pretty tight restrictions on growers on what they would accept. Those restrictions will come off.
If a grower doesn’t have contract on a vineyard will see how much he can push envelope and how much can hang. Growers and wineries will work together first for quality then for as much as possible.
There’s definitely going to be more fruit hung. We must have new acreage or plantable acres coming in to change the meter at all. We’re not going to do it by hanging another ton of fruit per acre.
