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Sinking Euro and Rising Dollar Make Waves in the Wine Industry

Shifting exchange rates are producing beneficial ripples of change for American consumers and European wineries
Photo by: Think stock by PeJo29
One dollar won't buy 100 euros of wine just yet.

Christine Dalton
Posted: April 16, 2015

If you’ve ever been tempted to hop on a plane and take an impromptu trip to Europe, now is the time. With the dollar at a 12-year high, currently at $1.07 against the euro, Americans have the opportunity to book a 5-star Italian hotel or overindulge at a French bistro without the financial regret that would have accompanied such splurges just a few months ago.

Changing exchange rates are also impacting the wine industry, albeit slowly. European wines should be cheaper when paying with dollars, but wineries and merchants are just beginning to pass those savings along to the consumer. And the strong dollar is spurring European vintners to give the U.S. market more attention. As for American wineries, the impact is muted for premium wines, but it's changing the selection of value wines we see on grocery store shelves.

In a simplified economic model, a depreciated euro would mean lower-priced European wines in the United States, enticing Americans to purchase more of those wines. On the flip side, we’d expect domestic wineries to suffer as they attempted to sell their now-more-expensive wines abroad.

But American wine consumers shouldn’t expect big savings on European wines just yet. Wineries tend to be cautious on letting prices fall. And because the U.S. wine market operates on a three-tier system, explained Dave Holt, president of importer Dalla Terra, “there’s no guarantee that if we lower our price that that price will show up at the consumer level any time soon.” Wineries, importers, distributors and retailers would all have to agree on a lower price point before consumers see savings.

In the past month, some retailers have begun offering lower prices they credit to the strong dollar—but it's just a trickle so far. “I think what maybe happened when the euro started plunging against the dollar is that some people in the business felt like this was an opportunity to pocket the difference,” said Nicholas Jackson, wine buyer at Sotheby’s. “But now, the public is so well aware with what’s going on with the exchange rate that it’s very hard to get away with that.” He expects retailers to begin big marketing campaigns in coming months touting their latest offerings purchased at the new exchange rate.

Don’t expect to see those lower prices reflected in the 2014 en primeur campaign in Bordeaux, which kicks off this month. After three consecutively poor campaigns, a group of leading U.K. wine merchants released an open letter in January calling for a universal price reduction.

But château owners know they can give U.S. consumers more buying power without lowering prices, thanks to the strong dollar. “There’s really no incentive for anyone to reduce their prices when they know they could offer the same price and [the wines will cost] less for us than they were last year,” said Jackson. In his estimation, even if a château keeps prices identical to last year, Americans would see a 25 percent price reduction. Several château owners have hinted they will raise prices slightly.

While big savings have yet to arrive, foreign wineries have begun to see the benefits of a bullish U.S. market. Catherine Miles, vice president of Broadbent Selections, whose portfolio includes wineries in Europe, South Africa and Australia, says that the strength of the dollar is leading foreign producers to see America as a land of opportunity. They see the potential for increased sales in upcoming months and have been dedicating more money to better by-the-glass and retail programs.

Champagne producers in particular are taking note. Historically, a strengthening U.S. economy correlates with an uptick in bubbly sales, no matter the value of the euro. Sam Heitner, director of the U.S. Champagne Bureau, said U.S. sales started improving in 2011. In the years since, Champagne prices have remained steady, but inventory has moved more quickly off shelves, and producers have been able to import and sell more cases in the U.S. A stronger dollar will only strengthen the trend.

If sales of European wine surge, will domestic wines suffer? Jackson doesn’t think so—at least not at the uppermost levels. He believes the premium California-wine patron will always remain loyal. “I don’t think [high-end California wines and high-end European wines] are competing markets.”

California’s fine-wine producers may even benefit from reduced production costs if they use French oak barrels. Because most are bought and sold in Europe, a €750 barrel that cost $975 last year year now costs approximately $825, according to Jason Stout, international sales director of Cooperage 1912, a Napa barrel merchant.

There may be an issue, however, for Californians who grow grapes for value wines. Wineries that buy and bottle bulk wine are increasingly looking to foreign sources like Chile. Big companies that used to source wine from California’s Central Valley are using the dollar’s purchasing power to buy cheaper wine elsewhere.

Central Valley growers have already ripped out 20,000 acres of vines this year because their yields would “be insufficient to make an economic profit given the cost of substitute grapes from offshore,” said Rob McMillan, executive vice president and founder of Silicon Valley Bank’s Wine Division. As he puts it, for a producer of inexpensive wine, Chardonnay is Chardonnay.

That surging dollar's long-term impact on the wine industry is hard to predict. But for now, consumers should be scouting for bargains.

Harvey Steiman
San Francisco —  April 16, 2015 12:18pm ET
One aspect of every story we read about the currency fluctuations is that importers smooth out the ups and downs by routinely investing currency futures. They're always dealing with an average of the current exchange rate and what they've already purchased for the next year or two. That's one reason why prices for imports don't shoot up as soon as the dollar falls, or suddenly shrink when the dollar gets stronger. If the exchange rate stays stable for a while, everything catches up.
Kasey A Carpenter
Fort Worth, Texas —  April 16, 2015 2:46pm ET
Harvey,

What you say is true of the top four or five importers in terms of size, but the smaller guys, and virtually all wholesalers, avoid the currency market altogether.

Many times with these smaller relationships (small importer/small producer) the agreement is to keep prices stable simply because of a mutual understanding that currency markets swing. Of course, the shipping and compliance companies don't agree to these terms, but many foreign markets will work with many US based importers and wholesalers (and vice versa - like back when the euro was killing the dollar) to keep prices stable, regardless of which side of the rise/fall ratio they're on.

All of this being said, there are some wonderful deals to be had from our fine friends north of the border in Canada right now thanks to their weak position against the dollar.
Michael Brill
San Francisco, CA —  April 17, 2015 2:05pm ET
Remember that the whole US side of the channel - importers, distributors and retailers - are responsible for up to 75% of the end consumer pricing which has a tremendous dampening impact on currency swings.

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