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Tough Times Call for Tough Shoes

Photo by: Greg Gorman

Posted: Mar 25, 2009 1:44pm ET

Wineries in California are dealing with the recession in the same way most of us are: tightening their belts.

Many have cut staff and salaries. A few winemakers I’ve talked to gave their staffs raises to keep morale high, but cut their own salary.

Wineries are generally trying to renegotiate grape contracts for 2009 at lower prices. The most-prized vineyards can hold their prices because demand still exceeds supply. Vintners who want to reduce costs know that paying less for grapes is crucial and unless the vineyard is special, seeking grapes from other sources is an easy option.

Inventories are a big issue for most wineries. Many wineries that sold their wines in the final quarter of last year are finding that the distribution system is still clogged with wine as consumers rein in spending. Many retailers can’t handle a new vintage.

Because of that, producers large and small are watching their inventories stack up. Small producers have long struggled to get their wines distributed but the new economy is making matters worse. As for big producers, just do the math. Take for example a big Cabernet house, such as Silver Oak. For the just-released 2004 vintage, it produced 67,000 cases of Alexander Valley Cabernet, at $70 a bottle, and 37,000 cases of Napa Cabernet in 2003 at $100 a bottle. While it sells through the 2004s, it has wines from 2005, 2006, 2007 and 2008 waiting in the wings and it’s only six months away from harvest 2009. That’s a lot of wine to sell these days, even for a popular brand like Silver Oak.

If wineries can make it through the next 12 to 18 months and sell their 2006 and 2007 vintages, the small 2008 crop will reduce supply, which in turn should also firm up demand. I expect that 2008 will have some excellent wines because the grapes that survived the topsy-turvy growing season will be handled with tender loving care. The 2008s I’ve tried are pure and concentrated.

Wineries hate to cut prices because pricing is part of their image and reputation. Some wineries will sell inventory to obscure markets, perhaps overseas or to cruise lines. Some wineries will simply re-label a portion of their wines and sell it under a second label at a lower price so it won’t affect overall pricing.

At the extreme some wineries will destroy bottles. It might be an inexpensive bottle of old White Zinfandel that has turned. Or it could be an expensive Cabernet from a vintage that didn’t move.

Wineries are also working markets more aggressively. As the late Ridge Vineyards president Donn Reisen used to say: “Tough times call for tough shoes.” Sales forces are hitting the streets.

Hugh L Sutherland Jr-m
miramar beach, fl —  March 25, 2009 4:42pm ET
I read a lot about the bad econonmy and hard to sell wines. However, I have yet to see any change in the prices. Could it be that the distributors and wine stores are taking advantage and not passing thru the prices? Remember the 15 bottles cases of the 80's?
Tom Glover
The Woodlands, TX —  March 25, 2009 5:50pm ET
I wonder if people are not yet realizing the impact of the economy on wine. Here's an excerpt from an article about restaurant sales....While Houstonians are frustrated by America¿s economic travails, he found the mood here very different from most other places. We¿re day; Chicago and Detroit are night. He was in the Windy City in early February, a couple weeks after he made the Motor City rounds.¿They¿re virtually dead at this point,¿ McClung said. ¿It was actually painful to visit. I simply can¿t sell any high-end wine there right now. I¿ve got a great reputation in the Chicago market and great relationships, but if I walk in with anything that costs more than $25 a bottle they just flat out tell me ¿no.¿ It doesn¿t matter what the quality of the wine is or the history of the producer. Everywhere I went it was, ¿Tony, if it costs more than $25 a bottle, I can¿t sell it.¿¿Detroit is much, much worse. Detroit is the most depressing city I¿ve visited in the last six months. People are in a very bad mood. There¿s no other way to say it. For example, I called on a high-end Wolfgang Puck restaurant in an Indian casino complex. The Puck organization has always been a very strong supporter of ours. But the wine director told me, ¿I can¿t buy a single thing. I¿ve got no budget for it. I¿m still living on what I bought in November.¿ ¿I believe in a prior blog, there were comments about pushing sales to restaurants. But if they are backed up on inventory and going for cheaper wines, then doesn't this really start to come back to the wineries quicker than one thinks?
John Jorgenson
Seattle, —  March 25, 2009 6:38pm ET
It would seem to me that one way to lessen the inventory problem would be to sell futures at a significant discount, maybe 33 percent, to those on mailing lists and former customers. Perhaps a program named something like Futures for friends!That was what surprised me most when you posted that the Santa Barbara futures event was canceled. Since Spectator benefits from a healthy wine industry, perhaps it should also offer a discount for advertising on the website classified section. I copied this from your site:Winespectator.com is, by far, the largest and most heavily trafficked wine Web site in the world. Traffic now exceeds 500,000 visitors and 5 million impressions per month. Just as Wine Spectator is the leading print magazine in the wine world, winespectator.com is the leading wine Web site. So e-mail or call today to find out how this exceptional advertising opportunity can work for you! Perhaps a little co-op should be established to list futures for wines here on Spectator. I would think such an endeavor could be a win, win, win situation for the wineries, the consumer and your magazine. Just a thought.
Tyler Mcafee
Houston, TX —  March 25, 2009 7:41pm ET
If wineries are overly concerned about image and don't want to lower their bottle price, there are ways to move wine other than specifically cutting the per bottle cost...especially with those that rely heavily on mailing lists. "Buy 5 bottles, get the 6th one free!" "25% off for mailing list members only!" "FREE SHIPPING!" Come on, be creative people.
Randy Sloan
St. Helena, CA —  March 25, 2009 11:43pm ET
As the owner of a small winery, I've seen my loyal, regular customers hang in there. However, new mailing list members are sticking with what they already know. Restaurants and stores have all but disappeared. They're living off inventory or moving down market. Special pricing and incentives help, but still don't move enough wine. It's ugly out there. Like in every other business, we all just hope to survive through this. Tyler, being creative is good advice. Customers should look for such wineries.
Milton Boyd Teegarden
March 26, 2009 11:36am ET
As another small winery owner/winemaker, I hear all the time that customers are buying down. What I see when I've been visiting markets is customers want value and I believe value is in the eye of the beholder. So value can be at any price but when the wine shop salesperson or grocery wine department salesperson starts to spend the customers money thats a problem. The example is they have stopped asking the customers what types of wine they like and selling from there. Now they are just taking the customer to the inexpensive Malbec or little Spanish red and these wines may be cheap but are not values based on what the person had been drinking. So is the customer automaticlly buying down or is the shops pushing the customers further down the pricing scale then they would actually go?
Tom Glover
The Woodlands, TX —  March 26, 2009 3:18pm ET
Is it better for a winery to discount its prices on mailing lists and maintain the retail prices? How much of a difference is there in the sales price of wine when selling to a retail buyer and selling direct to the customer? I've looked up a few wines that sell online and their price is greater than the price I can get at Spec's in Houston, a large wine retailer. That doesn't make sense.
Jeff Stevenson
Santa Rosa, CA —  March 26, 2009 8:22pm ET
Tom,Wineries will almost always post their full-retail prices on their website and in their online stores to try and preserve their price points whenever possible. When they sell into the distribution network, the distributors and/or subsequent retailers are generally free to set their own prices that they then charge the consumer.When we get better discounts by buying larger quantities direct from wineries (which is happening more and more these days), we can then pass this along to our retail buyers such as yourself. Jeff Stevenson, CEO/Provino Premium Wines
Randy Sloan
St. Helena, CA —  March 26, 2009 11:57pm ET
Tom, there is of course some variation, especially in these tough times, but generally...A winery sells to a distributor for 1/2 the suggested retail price. Distributor pays transport, marks up to what is about 1/3 off retail and sells to restaurant/retailer.A winery selling direct to a restaurant or retailer will sell the wine for about 1/3 off retail and pay for shipping.So, the retailer/restaurant gets it for about the same price whether going through 3 tier or 2 tier system.Wineries have some leeway in pricing for special customers, etc but overall, we don't want to be in competition with our distributors, retailers, and restaurants. While we'd make more profit selling everything direct, THAT, in my opinion, is not a sustainable business model.
Karl Mark
Geneva, IL. —  March 27, 2009 7:06am ET
Perhaps this economy will push wineries to go back to affordable blends and appellation wines, as opposed to a bazillion individual vineyard specific wines.
Tom Glover
The Woodlands, TX —  March 27, 2009 7:10pm ET
Jeff and Randy, Thanks for the information, definitely enlightening. The wine business is definitely interesting, from the family run vineyards to the large corporate wineries. Then the rules about how one can sell wine, and the various ways of marketing wine.
James Zalenka
Pittsburgh PA —  March 30, 2009 4:22pm ET
Wine is like any other product and subject to supply and demand. If, as you say Jim, inventories are backing up all through the distribution chain, then prices will come down. Of course, no one wants to discount their product, but currently we are in a deflationary period and almost no one has pricing power. Look for bargains through the end of the year on higher priced wines, and maybe next year as well.
Michael Henderson
Martinez, CA —  March 30, 2009 7:12pm ET
Retailers at every level (Look at Saks, Nieman Marcus) have adjusted their prices for this economy. In addition, retailers have conditioned their customers to never pay full price. For years wineries have charged their best customers (those that walk in the tasting room/mailing lists) the highest retail price. To say you don't want to be in competition with retailers, distributors and resturants just doesn't make sense to me. Everyone is your competitor this day and age. Once I pay a lower price per bottle someplace else I never buy direct from that winery again.With so many great wines avaialbe from some many areas of the world to think California can continue to charge these sky high prices is a poor business model in my opinion. When a new Napa winery introduces their first vintage at $75, $100, $125, with no history, no reputation this is insane. Let's hope this economy bring things back into perspective and the truely good wineries that offer true value survive and thrive.
Jeff Stevenson
Santa Rosa, CA —  March 31, 2009 4:43pm ET
Hello James... I read this post with interest as my company, Provino, Inc., is working to address helping wineries widen their direct-to-consumer channel and move more wine behind the scenes for them. We are meeting with good success. I thought you might beinterested in that.If you have any questions, let me know...cheers!

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