Sky-High Wine Prices As the boom of the 1990s pushed bottle costs to record heights, California wines challenged France for world price dominance, with Italy close behind.
		California Takes on the World During the roaring 1990s, the Golden State challenged Bordeaux as the global leader in wine prices, but does it have staying power?
		What's Behind the Bottle Price? When it comes to figuring a wine's final price, production costs count, but image is the wild card.
		Restaurant Wrangling Customers and sommeliers are wrestling over wine list prices in restaurants across the country.

Bill Harlan leans over a yellow legal pad to sketch out the economics of his particular brand of winemaking. Harlan, in his office at Meadowood Resort in St. Helena, Calif., can offer many reasons why he priced his 1998 Harlan Estate, one of Napa Valley's most expensive and most scarce Cabernet Sauvignons, at $175 a bottle (the 1999, to be released next spring, is priced at $250 a bottle).

He begins the tally with prime Oakville real estate, and then adds 12 years of writing checks for rootstock and barrels and bottles, prior to the release of the first wine. Add to that his labor-intensive regimen for growing and winemaking, which includes 26 individual lots in 32 acres and calls for yield control so severe that in 1998 Harlan harvested less than a ton of fruit per acre, a fraction of the Napa average.

It's all there and more, the math detailed on his yellow pad, and he makes a convincing case. But tossing his pad onto the coffee table, Harlan says something unexpected.

None of that matters. "Just because a certain wine costs more to produce, doesn't mean it's worth it," he says. "It's the market. No matter what we do, the market is going to tell us what it thinks sooner or later."

The market, for many consumers, retailers and now even some producers, is speaking with a bullhorn these days: California's top wines are too expensive. "I think the problem has been that we, the industry, got spoiled in the decade of the '90s," says Michael Mondavi, chairman of Robert Mondavi Winery.

There are exceptions, of course. Some producers have held the line, and some regions such as Mendocino and Monterey produce relative bargains. Also, varietals such as Zinfandel and Sauvignon Blanc remain mostly value-priced. And yet many see a stock-market-size correction already taking shape, and except for highly sought after, tiny production cult wines, no one will be entirely immune.

It seems that in the new millennium the wine world is taking on a shape that's entirely different from the one it had in the sky's-the-limit 1990s.

"Consumers are balking," says Dan Rhodes, a wine buyer for Hi-Times Wine Cellar, a leading Southern California retailer. "They are still buying wine, but want to spend $10 or $20 for a bottle, and don't splurge on as many $50 or $100 wines. When you start talking to the consumer in the trenches of retail, $20 is a big road block."

Even avid wine consumers don't want to pay more than $40 for a wine. "Wines $40 and above are a tougher sale," says Todd Hess, wine director of Chicago-based Sam's Wines & Spirits, one of the largest premium wine stores in the Midwest. "Two years ago, that wasn't case."

Selling high-end Chardonnays and Merlots is a particular challenge, retailers say. Yet most of the consumer resistance is focused on the wave of cult Cabernet wannabes that began emerging from Napa Valley in the 1990s, wines with no track record or little pedigree that sell for $50 to $100 on first release.

In the past two years alone, according to Wine Spectator records, there have been 33 new wineries or labels from California releasing wines priced at $50 or more. Twenty-three of these wines hail from Napa Valley, and all but one were produced in quantities of 1,000 cases or less.

Even Napa stalwarts such as Bill Harlan and Caymus owner Chuck Wagner admit that you don't always get what you pay for when it comes to California's leading wine region. "I think there is a shakeout going on," Wagner says. "I think Napa is a mixed bag. There are some wines that are 30 bucks or 60 bucks that aren't too good. They're overpriced." Harlan adds: "Certain wines are not overpriced and certain wines are. I would say we [Napa Valley] are a little overpriced in general."

Retailers say the race to be the next Colgin or Screaming Eagle drove prices ever higher as producers jockeyed for position and prestige. Now many of those wannabes are gathering dust on the shelves. "Collectors have slowed way down in their spending, dramatically," says retailer David Breitstein of the Duke of Bourbon in Canoga Park, Calif. "Investment collecting has slowed to a trickle."

What has caused the reversal in fortune for California vintners? The cause most often cited is the economic recession. Another key factor is the mediocrity of the 1998 vintage. Other reasons mentioned include increased global competition, a glut of wine after years of short supply, and old-fashioned, free market greed. Many think the wine industry is simply experiencing a hangover, a temporary soft market on the heels of the boom of the 1990s, which brought it unprecedented good times.

During the decade, the United States went through the longest period of economic growth in its history, and, serendipitously for vintners, this coincided with eight exceptional vintages in a row from California, 1990 to 1997. Americans reached new levels of wine appreciation during the period, as well. This was boosted by 60 Minutes' "French Paradox" episode in 1991, as tens of millions of Americans heard about the health benefits of moderate wine consumption on the nation's most popular news program.

Nearing the end of the decade, the Internet bubble was fueling extravagant purchases throughout the economy, wine included. But something happened on the way to the party. The Internet boom went bust at the turn of the century, and the stock market tanked. Then came the terrorist attacks of Sept. 11.

The travel and leisure industries were hit hard and restaurant wine sales plummeted. The impact highlighted the fundamental shift that had occurred regarding how many high-end wines were bought and sold in the United States; during the 1990s, the California industry increasingly catered to restaurants as the preferred venue for wine sales, believing that they were more prestigious locations than retail stores.

The ambiguities of restaurant pricing also appealed to producers. Restaurant markups, presumed steep, hide winery-level price increases better than retail price tags can. Restaurants also offer better brand protection; producers with extra inventory or cash-flow problems can offer deals and discounts to restaurants, knowing a restaurant won't sully the label's reputation by lowering the price. The restaurant industry is recovering, but the National Restaurant Association reports that high-end restaurants will be lucky this year to surpass 2001's sluggish sales.

To make matters worse, a flood of new wine is on the way as the vineyard-planting boom of the 1990s bears fruit. In 1991, about 327,000 acres of wine grapes were in the ground in California, but by 2001 the acreage had reached nearly 490,000 -- a 50 percent increase in 10 years. Just as revealing is how many of those acres were still so new in 2001 that they were not yet producing wine -- about 65,000 acres, or 13 percent.

Many of the new grapes are in the Central Valley and will go into $5 or $10 wines, but the growing glut is hardly limited to this price point. Consider Sonoma County Pinot Noir, for example: 9,782 acres were in the ground in 2001, but 40 percent of that acreage wasn't yet producing wine, according to the California Agricultural Statistics Service.

Times are officially tough. Wines once seldom seen at retail -- Jordan, Patz & Hall, Williams Selyem, Silver Oak -- are suddenly available. Check any Costco, a discount warehouse chain that is now one of the nation's largest wine retailers, and you're likely to find ample supplies of wines such as Dominus, Phelps Insignia and Beringer Private Reserve Cabernet. Although many top California producers say that they still need to allocate their wine, getting on some mailing lists is a lot easier than it used to be.

The middling reviews for many of the 1998 wines haven't helped. "No retailer in his right mind is going to buy the '98 Cabernets unless they get a deal," says Wilfred Wong, a wine buyer for Beverages & More, a discount retailer with 26 locations in Northern California. "Wineries are in trouble with the '98s. They may be selling the '99s at the winery and to the mailing list, but their vendors have the '98s."

Patience, producers hope, will be a virtue. The '99 crop was small, and many wineries are convinced the '98 Cabernets will improve with bottle age. Mondavi says that demand was so high for the high quality '97 Cabernets that many wineries ran out and rushed their 1998s into release before they were ready.

Price, he says, was another issue with the '98s. "We made a mistake with pricing our '98 Cabernet Reserve," Mondavi says. "We kept it at the '97 price and should have dropped it." As a result, Mondavi is placing a larger than usual supply of the vintage in its library. "We're just letting it rest."

And yet, many of the state's largest producers -- Beringer Blass Wine Estates, Kendall-Jackson Wine Estates and Allied Domecq -- say sales may be stagnant, but they're not dropping.

"Is the trend showing that growth is starting to level off? Yes," says Jim Watkins, president of the American division of the Australian-owned Beringer Blass. "Are California wines in general overpriced? Absolutely not. Some are. There's no question. For the vast majority of California wines, the American consumer is willing to pay more. I don't believe we're seeing a fundamental change in what consumers are willing to pay for California wine."

Kendall-Jackson president John Grant agrees. "When economic prosperity returns, so will the growth of high-end luxury wines," Grant says. "I don't think it's a matter of California not being able to compete. I think it's just a matter of people not being able to buy the quality products they once could. Yes, we would like to have less inventory than we have right now but, we're not driven to the point of desperation that we need to drop prices."

Bill Newlands, president of Allied Domecq USA, which owns Mumm Cuvée Napa, Buena Vista Winery, Clos du Bois and other labels, adds, "I don't think the industry as a whole has a pricing problem. But then, there are certain brands who have not demonstrated the value of their product to consumers."

Whether it's the economy or a new mindset for consumers, California is finding tough competition in a world where almost every region seems to be making better and better wine. Where California stands in this global market depends on who you ask and which region, varietal or price-point you're talking about.

"Once you get under $7, you're getting to a place where California has a difficult time competing. That's not a happy hunting-ground for California," Grant says, listing the high cost of labor and land as the main culprits. "But I think California does a much better job in the $12 to $20 range than imports, except for maybe the French."

But for all the bargains still available, it appears that wines priced above $20 are facing much tougher times in the marketplace. Whether that translates into widespread price reductions by producers to spur sales remains an open question. Many California vintners believe that their wines are worth every penny they charge for them, and are not willing to lower prices, at least not yet. Ultimately, however, the market will decide for them.

While Napa's top Cabernets are among the most expensive in the world, producers such as Wagner and Harlan believe their wines have a proven pedigree, and so too, for that matter, does Napa Valley. The same might be said for California wines in general. But like the economy, the wine industry goes through bear markets as well as bull. Even the reliably optimistic, such as Mondavi, believe it will be two or three years before the industry returns to the good times.

For his part, Allied Domecq's Newlands hopes the industry takes a lesson from these troubling times. "We certainly need to be careful not to be overconfident. I think that we're at a point that we need to have a much better finger on what the consumer wants. We sometimes get isolated in our thinking and spend more time talking amongst ourselves and not enough with the consumers. That's a dangerous proposition."