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mixed case: opinion and advice

Will You Pay More for Wine in 2013?

Grapes are becoming more expensive, and wineries are feeling the pinch
Photo by: Mark Weinberg

Posted: Feb 7, 2013 12:00pm ET

By Mitch Frank

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?

Tim Fish
Sonoma County —  February 7, 2013 12:41pm ET

Did we specify where the dinner would be? If I lose, Taco Bell. If you lose, French Laundry. Sounds fair to me.

Good read by the way.
Howard Fisher
Dallas, Texas —  February 7, 2013 12:52pm ET
I have kept my price per bottle range flat over the last 5 years. If the price isn't within that range, I don't buy it. I also reduced my total purchases last year.
Brian Loring
Lompoc, CA, US —  February 7, 2013 2:04pm ET
Given how low yields were in California 2010 and 2011 (with 2011 being off about 50%) we had no choice - we had to raise prices. As we buy a significant amount of fruit by the acre, we paid more per ton (on average) for fruit in 2011 than in any previous year. And our fixed costs didn't really change.

We hope that consumers recognize that we'd dropped our prices when the economy tanked at the end of 2008. And that while we've raise prices this year on our 2011 vintage wines, it's the first time our price is higher than what we charged for our 2006s. And even at the new higher price, we're just shooting to break even on the 2011 vintage.

I think most California wineries face the same issue. So price increases will have to follow once more of the 2011 vintage starts hitting the street.
Timothy Perr
Santa Monica, CA —  February 7, 2013 6:55pm ET
Mitch, I think you will be owing Tim dinner. Value sells during all economic conditions. Never in my life have I seen some many great wines priced between $20 and $30. Even with the challenges you describe relating to increased costs, more and more fantastic wines are hitting the market every year in that price range. I just don't see consumers abandoning the price point.

From our experience, costs to make a case of wine went up by 15% from the 2011 to 2012 vintage. We project costs to rise another 5% from the 2012 to 2013 vintage. 95% of our wine is right around the $20 per bottle price point and, while demand has been increasing, there is no way the market will allow us to pass along the entire increase in our costs. (Nor will the market accept a decrease in our wine's quality.) Quite a dilema.

-Tim/Pali Wine Co.





Mitch Frank
New Orleans, LA —  February 8, 2013 11:43am ET
Thanks for all the great comments.

Brian and Tim - I feel your pain. It is a tough situation for both wineries and consumers. Ironically, if a wine costs $100+ and sells out by allocation, a price hike is no big deal. If a company makes 1 million cases a year, they can control costs. But if you make great wine at $25, you don't have much margin to spare.

That said, most consumers are watching their incomes stagnate, so I don't see a way out soon.

Mr. Fish, I believe the deal should be winner gets a meal at a Grand Award winning restaurant in his area. So get ready to come to New Orleans.

Cheers,
M.
David Strada
San Francisco, CA —  February 8, 2013 12:48pm ET
Mitch

This is a very interesting discussion and coming to a conclusion will take time. Changes in the wine marketplace develop over months and years. It would be interesting to also consider the affect of the ample 2012 California harvest, especially with Pinot Noir.

Do let us know who ends up buying dinner and where you go, and what you drink.
Adam Lee
Sonoma County, CA —  February 9, 2013 2:16pm ET
So, how did you two decide to define "when the good times come back?" That's a very unclear description. Any insights?

Adam Lee
Siduri Wines
Bill Matarese
Florida, USA —  February 11, 2013 12:42pm ET
Regardless of the economy, harvest/growing conditions, etc. it will always be possible to find excellent wine at a bargain price if one has patience and makes the effort to look for them.
James Harding
Macungie, Pa. USA —  February 12, 2013 6:35pm ET
Have to agree with Bill from Florida. With all that is available globally and improvements in quality it is still a buyers market unless you have to have a niche wine. You don't have to go to Napa to find a good drinkable Cab or Burgundy for a solid Pinot. I say let those that want to pay a high price do so as that leaves better values for the rest of us who can't afford even $50 a bottle.
David Weisfeld
Kihei, Hawaii —  February 19, 2013 8:30am ET
Aloha All,

This is an interesting conversation; which I often have with myself. I am a relative newbie to the world of fine wines; beginning with a gift subscription to WS back in 2003-4. I began my wine adventure by searching for the least expensive 90+ bottles and assembled, what I thought of at the time as, a decent collection of moderately priced wines. Most of the wines were foreign; Chile, Argentina, Australia, Spain. As my palate has evolved over the past decade, I have begun researching, seeking out, and buying higher rated wines at higher prices. I am just now drinking some of the wines which I purchased back in the early years and have found that my research & patience has been pleasingly rewarded. I love when my guests compliment me on a $10-15 bottle I purchased way back then commenting that they thought it must be a much more expensive wine.

Now of day, my value orientation still persists, but my budget per bottle has increased to $25-50 on average. (Brian, I purchased a case each of your 2009 Russian River Valley & Santa Lucia Highlands Pinots a few years back and got to your tasting room in Lampoc this past summer) Although I still enjoy wines from around the world, my purchases are now increasingly focused on smaller domestic producers; enjoying mostly pinots, cabs & syrahs from California, Oregon & Washington. Unfortunately, I have maxed out my 20 case home storage capacity and was forced earlier this year to construct a 72 case vault in a cold storage facility which is too quickly filling up as well! ;-)

So where does this discussion lead, I think that there will always be consumers at all ends of the spectrum; value consumers, high end consumers and those in between. I think that producers that consistently strive to deliver quality at whatever price point they target will be successful (ie: Meomi being produced by Belle Glos). No matter which way prices go I know that, I for one, will continue to consume wine. My appreciation goes out to all the parties involved in delivering love in a glass!

Cheer!

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