Luxury Wine Market Reels from Downturn
Posted: Wed Jul 08, 2009 5:45 pm
By JIM CARLTON and DAVID KESMODEL
ST. HELENA, Calif. -- Many of America's high-end wineries are reeling from the economic downturn, as even wealthy drinkers slash spending on fine wines.
The slump comes as Americans continue to drink more wine overall. Recession-weary consumers, however, are buying more mid- and low-priced wines, causing a sharp falloff in sales of wines priced at $25 a bottle and higher.
The shift is pinching the profits of luxury vintners in Napa and Sonoma counties and forcing many to cut prices and seek new distribution channels. Some hard-hit wineries have quietly put themselves up for sale. There is likely to be "a lot of M&A activity in the short-term," says Mike Jaeger, president of Wilson Daniels Ltd., which helps luxury winemakers market their products.
Auction Napa Valley raised $5.7 million in Oakville, Calif., last month, down from $10.4 million raised last year. This year, some big bidders stayed home.
The slump follows a long boom period for high-end wines fueled by Americans' rising wealth and interest in wine. In previous recessions, the high end -- less developed than it is now -- was relatively unaffected. "Nobody in the world has seen something like this," says Claude Blankiet, a maker of fine wines. Revenue at his Yountville, Calif., company, Blankiet Estate, has slipped 40% this year, he says.
Total U.S. wine sales rose about 5% in terms of volume in the first quarter from a year earlier, but wines priced at $25 a bottle and up fell about 12%, estimates Jon Fredrikson, an industry consultant with Gomberg, Frederikson & Associates in Woodside, Calif.
One sign of the times: Auction Napa Valley -- the premier charity and social event of the year -- raised just $5.7 million last month, down sharply from the $10.4 million raised last year.
The change in consumers' buying habits, which became pronounced last fall as the recession deepened, has prompted many retailers and distributors to cut orders of luxury wines. And when they do order the higher-end wines, they are often asking for steep discounts, which are being passed to consumers.
At a Dominick's supermarket in Lincolnwood, Ill., a 2005 bottle of Gundlach Bundschu Merlot from Sonoma recently was marked down 30% to $23.09.
"Your ability to take advantage of the marketplace is as evident as ever," says Daniel M. Taub, a real-estate executive in Rye Brook, N.Y. He recently has been snapping up upscale wines at discounts of 10% to 25%.
But such price cuts are taking a heavy toll on wineries' cash flows, and could make it difficult for them to raise prices in the future. "If you're a $90 wine and all of a sudden you're on the Internet at $50, how do you ever become a $90 wine again?" says Elliot Stern, chief operating officer of the Sorting Table, a Napa Valley-based wine distributor.
One of the main markets for high-end wineries is luxury restaurants, and they have been hurt as Americans dine out less. Morton's the Steakhouse, an upscale restaurant chain, has revised its menu to offer more bottles in the $60 to $70 range. "A lot of our guests don't want to pay for $200 or $300 wine," says Tylor Field, vice president of wine and spirits for the Chicago-based chain.
That has forced some vintners to shift their sales tactics. Duckhorn Wine Co. in St. Helena has increased the "winemaker dinners" it puts on to woo restaurants and other top buyers. Cain Vineyard and Winery in St. Helena has increased the amount of wine it sells to restaurants to sell by the glass, instead of the more common practice of selling the wine at a higher rate per bottle. Restaurants that get wine at the per-glass discount do so because they generally need to buy more bottles of wine because more people order by the glass. "Restaurants put up a virtual buying freeze a few months ago, so we had to do something," says Christopher Howell, Cain's winemaker.
Distributors are pulling back, too. Henry Wine Group, a distributor in Benicia, Calif., has cut its number of wine products to 3,000 from 3,600 a year ago. Fred Reno, chairman of the company, said many of the discontinued wines include high-end California labels.
The companies most vulnerable to the downturn, and which may not survive, are mom-and-pop vintners that began operations in the past three to five years and lack established brands, analysts say.
Some of the newer operations are using new marketing techniques to cope. Alpha Omega, a boutique winery in Rutherford, Calif., has begun using online services Facebook and Twitter to reach out to its customers. The winery three years ago began targeting consumers directly, and the strategy is now paying off; revenue is up 40% so far this year, compared with a year ago, in part because it doesn't have to share many revenues with a distributor, says co-owner Robin Baggett.
The good news for high-end vintners is they are coming off an extraordinary run of near constant increases in sales over the past 15 years. Meanwhile, experts say the downturn has been mitigated by California's relatively lean grape crops in recent years, which have kept supply from outstripping demand.
Few industry observers expect many vintners to go under during this slump. But four wineries have consulted with Global Wine Partners, a Napa wine-industry investment bank, about needing to raise money, says Vic Motto, the bank's chief executive officer. And International Wine Associates Inc. is representing about 10 companies seeking to sell wineries or vineyards, an increase in activity from last year, says Robert M. Nicholson, a principal at the firm.
Industry layoffs, so far, have been milder than in many sectors because most Napa and Sonoma winemakers are small operations and often need what little staffs they have to run tasting rooms and keep vineyards in order. But there have been some notable cuts among some of the larger players. For example, Jackson Family Enterprises, a Santa Rosa, Calif., company that owns labels including Kendall-Jackson, laid off 12% of its staff in January. Last month, Foster's Group Ltd.'s U.S. unit, the maker of Beringer, St. Clement and other wines, said it would eliminate 120 jobs.
ST. HELENA, Calif. -- Many of America's high-end wineries are reeling from the economic downturn, as even wealthy drinkers slash spending on fine wines.
The slump comes as Americans continue to drink more wine overall. Recession-weary consumers, however, are buying more mid- and low-priced wines, causing a sharp falloff in sales of wines priced at $25 a bottle and higher.
The shift is pinching the profits of luxury vintners in Napa and Sonoma counties and forcing many to cut prices and seek new distribution channels. Some hard-hit wineries have quietly put themselves up for sale. There is likely to be "a lot of M&A activity in the short-term," says Mike Jaeger, president of Wilson Daniels Ltd., which helps luxury winemakers market their products.
Auction Napa Valley raised $5.7 million in Oakville, Calif., last month, down from $10.4 million raised last year. This year, some big bidders stayed home.
The slump follows a long boom period for high-end wines fueled by Americans' rising wealth and interest in wine. In previous recessions, the high end -- less developed than it is now -- was relatively unaffected. "Nobody in the world has seen something like this," says Claude Blankiet, a maker of fine wines. Revenue at his Yountville, Calif., company, Blankiet Estate, has slipped 40% this year, he says.
Total U.S. wine sales rose about 5% in terms of volume in the first quarter from a year earlier, but wines priced at $25 a bottle and up fell about 12%, estimates Jon Fredrikson, an industry consultant with Gomberg, Frederikson & Associates in Woodside, Calif.
One sign of the times: Auction Napa Valley -- the premier charity and social event of the year -- raised just $5.7 million last month, down sharply from the $10.4 million raised last year.
The change in consumers' buying habits, which became pronounced last fall as the recession deepened, has prompted many retailers and distributors to cut orders of luxury wines. And when they do order the higher-end wines, they are often asking for steep discounts, which are being passed to consumers.
At a Dominick's supermarket in Lincolnwood, Ill., a 2005 bottle of Gundlach Bundschu Merlot from Sonoma recently was marked down 30% to $23.09.
"Your ability to take advantage of the marketplace is as evident as ever," says Daniel M. Taub, a real-estate executive in Rye Brook, N.Y. He recently has been snapping up upscale wines at discounts of 10% to 25%.
But such price cuts are taking a heavy toll on wineries' cash flows, and could make it difficult for them to raise prices in the future. "If you're a $90 wine and all of a sudden you're on the Internet at $50, how do you ever become a $90 wine again?" says Elliot Stern, chief operating officer of the Sorting Table, a Napa Valley-based wine distributor.
One of the main markets for high-end wineries is luxury restaurants, and they have been hurt as Americans dine out less. Morton's the Steakhouse, an upscale restaurant chain, has revised its menu to offer more bottles in the $60 to $70 range. "A lot of our guests don't want to pay for $200 or $300 wine," says Tylor Field, vice president of wine and spirits for the Chicago-based chain.
That has forced some vintners to shift their sales tactics. Duckhorn Wine Co. in St. Helena has increased the "winemaker dinners" it puts on to woo restaurants and other top buyers. Cain Vineyard and Winery in St. Helena has increased the amount of wine it sells to restaurants to sell by the glass, instead of the more common practice of selling the wine at a higher rate per bottle. Restaurants that get wine at the per-glass discount do so because they generally need to buy more bottles of wine because more people order by the glass. "Restaurants put up a virtual buying freeze a few months ago, so we had to do something," says Christopher Howell, Cain's winemaker.
Distributors are pulling back, too. Henry Wine Group, a distributor in Benicia, Calif., has cut its number of wine products to 3,000 from 3,600 a year ago. Fred Reno, chairman of the company, said many of the discontinued wines include high-end California labels.
The companies most vulnerable to the downturn, and which may not survive, are mom-and-pop vintners that began operations in the past three to five years and lack established brands, analysts say.
Some of the newer operations are using new marketing techniques to cope. Alpha Omega, a boutique winery in Rutherford, Calif., has begun using online services Facebook and Twitter to reach out to its customers. The winery three years ago began targeting consumers directly, and the strategy is now paying off; revenue is up 40% so far this year, compared with a year ago, in part because it doesn't have to share many revenues with a distributor, says co-owner Robin Baggett.
The good news for high-end vintners is they are coming off an extraordinary run of near constant increases in sales over the past 15 years. Meanwhile, experts say the downturn has been mitigated by California's relatively lean grape crops in recent years, which have kept supply from outstripping demand.
Few industry observers expect many vintners to go under during this slump. But four wineries have consulted with Global Wine Partners, a Napa wine-industry investment bank, about needing to raise money, says Vic Motto, the bank's chief executive officer. And International Wine Associates Inc. is representing about 10 companies seeking to sell wineries or vineyards, an increase in activity from last year, says Robert M. Nicholson, a principal at the firm.
Industry layoffs, so far, have been milder than in many sectors because most Napa and Sonoma winemakers are small operations and often need what little staffs they have to run tasting rooms and keep vineyards in order. But there have been some notable cuts among some of the larger players. For example, Jackson Family Enterprises, a Santa Rosa, Calif., company that owns labels including Kendall-Jackson, laid off 12% of its staff in January. Last month, Foster's Group Ltd.'s U.S. unit, the maker of Beringer, St. Clement and other wines, said it would eliminate 120 jobs.
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