Wikinvest Wire

Fermented grape juice languishes

Tuesday, November 25, 2008

Anyone living in California over the last ten years or so has surely noticed the explosive growth in the state's wine industry. Having developed something of a taste for red wine over the years, we've felt fortunate to have lived in an area where you can get such decent wine for such a low price.

We are reminded of how spoiled we've become every time we travel and this will surely be one of the few downsides to leaving the Golden State.

What's been funny to watch over the last three or four years, however, is the sheer number of wineries and wine tasting rooms that have sprung up like mushrooms. Not far from where we live, there used to be 4 or 5 wine tasting rooms on Main Street - now there are 17.

It's not uncommon to see what appears to be a dilapidated farmhouse out on the back roads with a Wine Tasting sign out in front next to a few wine barrels stacked on top of each other.

You have to wonder how business is these days.

Given the current trajectory of the nation's economy and how hard California is being hit by the slowdown, they can't all survive.

It's one thing to go to Costco and pay $8 or $10 for a bottle of wine you'd pay three times that much for at a restaurant, but it's quite another to pay $25 or $30 for the obligatory purchase after sampling a glass or so in a tasting room.

When home prices were rising at the rate of $100K per year and jobs were plentiful, wine tasting trips made sense. With home prices now falling by that same amount and unemployment rising sharply, this has got to be one of the first discretionary expenses that will be cut.

This story in the LA Times is one of the first reports that I've seen on the developing slowdown in the industry. It will surely not be the last.

People are still drinking wine. They are just spending less.

"I still drink wine with my wife every night, but before I might have bought Santa Barbara County Pinot Noirs for $20 to $30; now I am paying $9.99 for a Castle Rock Pinot from Mendocino County," said Pablo Urquiza, a freelance television producer who lives in Marina del Rey.

He's not alone.

Sales of wine for $9 or less make up the fastest-growing segment of the wine market and sales above that price are starting to trend down, said Jon Fredrikson, a Woodside, Calif., industry analyst.
IMAGE Consumers are trading down to wine they consider "values," Fredrikson said.
Wine retailers aren't the only ones feeling the pain: Consumers are dining out less, slashing wine sales by as much as 15% in restaurants, Fredrikson said. All of this translates to lower sales for California's wineries, which sell wine with a retail value of $19 billion annually. Americans drink $30 billion worth of wine each year.

"Our sales are down about 10%, and I am surprised they are only down by that amount," said Ron Melville, owner of Melville Vineyards and Winery in the Santa Rita Hills in Santa Barbara County.
We recently saw that Two-Buck Chuck at Trader Joes now goes for three dollars. That could be a real problem for their marketing department.



Anonymous said...

In Ontario, we're paying vineyard owners subsidies to get them through the slump in demand. But they have to destroy the grapes. Way to create wealth.

Greyhair said...

Living in Sonoma County, there's no apparent, significant, slowdown here yet. The Bush years were so good for those with a buck that I suspect the backlog of dollars is strong enough for quality producers to stay strong. The lower to middle range has always been the area of fastest growth, so that's nothing new.

I suspect producers that sell primarily in supermarkets will feel it the most. Frankly, higher gasoline prices were more a threat to wine country sales than the current slowdown.

Tim said...

Good points - next time I'm in town I'll have to ask if the high gas prices had an impact earlier in the year. We're a couple hundred miles from the Bay Area - I didn't realize this might have had a bigger impact than jobs/housing.

Greyhair said...

There are a lot of people that are easily within driving distance of Napa/Sonoma. Drive north on Hwy 101 from San Francisco into Santa Rosa some Saturday morning and you'll see what I mean!

In a crappy economy, these "driving vacations" become more attractive over big ticket traveling, especially with gas dipping into prices starting with a "1".

Anonymous said...

California will probably return to its roots in agriculture. When I first arrived in California, most of what you could get were expensive boutique wines. Since then, I think the weaker dollar has helped out the industry enormously. Things may have reversed some due to the deleveraging but great selection at the lower end from California is something I expect should continue.

Anonymous said...

Tim, yes you are leaving the US wine mecca but have no fear, Oregon has fantastic wine and beer, my god I had my choice of five micro brews at the movie theater last night and if all else fails there is always Trader Joe's.


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