At the end of 2008, my California colleague Tim Fish and I made a bet. So far, neither of us has won. Tim was working with me on a cover story on how the wine industry was confronting the darkest days of the Great Recession, when average Americans were watching the value of their biggest assets—their homes—evaporate.
Despite their woes, consumers never abandoned wine. Since the early 1990s, wine has become an increasing presence in Americans' lives, and they were not willing to suddenly part with what they saw as a pretty affordable luxury. But they did cut back on what they were willing to spend—a $9 bottle became very attractive, and a special-occasion wine meant $25 instead of $40. Wineries responded. They did not cut prices too obviously, but they made less of their more expensive wines (like Russian River single-vineyard Pinot Noir) and shifted that juice into more affordable wines (cheaper Sonoma County Pinot).
I asked Tim: What happens when the good times come back? Tim bet that once consumers discovered that there are a lot of great wines at lower prices, they would never pay more. I responded that Americans are always aspirational—we always want to try something better, and once we had more money in our pockets, we would begin looking for even better, and yes, more expensive, wines.
Well, it's been four years, my latest Year in Review is in our January issue, and Tim still doesn't owe me a dinner. While the global economy is no longer in a state of panic, happy times have not returned either. After strong signs of growth in 2011 and early 2012, America's economy has stalled. The crisis in Europe has abated, but trouble remains ahead for some countries. China still grew, at 7 percent last year, but not enough to smooth the road for the rest of the world.
So while average middle-class consumers might be tired of looking for bargains, their wallets won't let them splurge. That's making a lot of winery owners groan, because they could really use more money.
U.S. consumers bought an estimated 325 million cases of wine last year, according to Impact Databank, a sister publication of Wine Spectator. That's 2 percent growth by volume over 2011. For wines costing $20 and up, Silicon Valley Bank's latest annual industry survey estimated that sales grew by almost 8 percent in value. But the bank's analysts are only predicting 4 to 8 percent growth in 2013. One reason: Growth kept slowing as 2012 went on.
Meanwhile, wineries are facing an increasing shortage of their most important ingredient: grapes. The 2012 harvest was a bumper crop on the West Coast, but that was after two meager years. Europe had a horrible 2012 harvest. Wine volumes around the world are at their lowest point in 37 years, according to the International Organization of Vine and Wine (OIV). The demand for more wine is making grapes more expensive. California grape prices rose last year, so much that imports of cheap bulk wine swelled 200 percent as large producers brought in 37.5 million cases' worth from places like Chile for bargain brands.
If the West Coast is going to keep up with demand, it needs to plant more vines. But land is a lot pricier than it was the last time there was a shortage of vineyards, in 1997. The big players have the money to invest. Kendall-Jackson bought a lot of land last year; Gallo has been aggressively buying vineyards and signing long-term leases. Those larger wineries can also improve their profit margins on wines in lean times, using their size to secure better bargains from suppliers, distributors and retailers. A few "smaller" buyers, like Bill Foley, have used their assets made in other industries to buy up a lot of properties and likewise build scale.
None of this offers much comfort for smaller wineries. Their best option is to raise prices. But few are planning to. They know consumers won't stomach paying more. The exception is at the very high end. Silicon Valley Bank surveyed its winery clients and found those who sell wines for more than $70 were most confident they could raise prices. Those selling wines between $20 and $29 were least confident. Consumers whose wealth lies in investments feel secure enough to spend. The average consumer? Not so much.
You probably won't find as many fantastic bargains in 2013, because excess inventory that wineries and distributors were desperate to sell has dried up. But you're probably not going to pay more for your favorite everyday wine. Wineries know you're still feeling uncertain. Believe me, they're feeling uncertain too.
So Tim has at least another year before he has to pay up. But what do you think? Would you be willing to keep buying your favorite wines if they raised prices this year? Do you think you'll ever start paying more for wine in the future?