The Coming Carnage?
- BernalKC Apr 16, 2010 03:23 PM
Alder Yarrow writes in his blog Vinography about looming dark clouds in the wine industry in this article, "The Coming Carnage in the California Wine Industry", http://www.vinography.com/archives/20...
He predicts that much of the industry is on the verge of a financial meltdown that will wipe out many smaller, high-end wineries. He notes that sales of expensive wines (>$30) are already down %15, and the accumulating stocks of unsold, unsellable premium wines portend deep discounting that will precipitate a "bloodbath" when banks move in and seize the inventories that have been used as collateral in a highly leveraged business.
What do you think? Is this a chicken little story? Or is this a storm that is about to break? Or is it already breaking?
Gut reaction- not a bloodbath, but a problem, especially as it incentivizes wineries to make high end wines approachable now, generally "Parkerizing" them, as opposed to wines that will only hit their peak 15 years after vintage.
A lot of these Napa wineries have huge debt owing on their expensive land. I wished I had saved the link but I saw a Napa Valley vintner show how his cabernet sauvignon cost $40 a bottle for land, the loan, barrels, bottles and taxes before ANY labor costs were added in.
The sad thing here is that the cream doesn't always float to the top. The ones with the best marketing plans are those that survive. More Yellowtail, less hard work in the vineyard might triumph with the mass market.
Since I have been active in fine wines, I have seen several ups and more downs. In each case, the downs ended with a shakeout and things got back to normal.
I also feel that this is going to be bad, and is going to get far worse, before we finally get to declare that "good times are here again," if we ever do. I do not feel that we are even close to seeing the "bottom," which probably will not hit for another year, or maybe two. How long we'll stay there is anybody's guess.
Without getting political, I feel that we will never see the "good old days" again. With VAT looming in the very near future, perhaps soon soaring to 40%, I doubt that we'll be seeing much high-end wine in the future.
Just looking over general posts here, the majority of people are now asking for good wines in the <US$ 10 range. Two years ago, it was something <US$20. Soon, we'll see many posts looking for good <US$5 wines.
At a recent charity auction, a lot of 6 btls, in vertical of Jos. Phelps Insignia, including the WS Wine of the Year, and all above 90 on two major ratings lists, went for below the initial cost, and this was a room with some heavy-hitters. Oh, and there was a wooden presentation box included. [I was lucky, that the high-bidder did extend an invitation to me to help drink my wine at a dinner, so life was not all bad, but that lot should have brought 2x what it went for.]
While I harbored desires to be a wine producer, gentleman farmer, I am glad that I did not succumb to that siren-song. Other investments have proved more prudent.
I'm just glad that I have a full cellar, so that should last me for maybe 4 - 5 years.
As France is being hit hard too, it will be interesting to see how Bdx and Burgs are priced, regardless of what the critics say about the vintages.
Thanks for sharing. Some things that I had not considered, or even knew to think about.
We'll all just have to wait and see what shakes out. Maybe we can revisit this thread in 2015 and talk about how things changed, for the better, or for the worse?
re: Bill Hunt
I agree with Hunt that this one is bad, and no matter how bad, you should not consider wine as an investment ever.
Rather than bore you with my recent conversations with major industry distributors, I'll just tell you this example: Diageo has been selling off wine inventory over the past 24 months and not buying its usual futures allotments -- and they still have inventory problems.
What does this mean for collectors of wines $30 and up? Huge buying opportunities as it will take many years for the current inventories to sell off. This class of wine isn't selling right now (except for millionaires), and certainly not at the pace that it was produced over the past 5 years. Meanwhile, lots of private collections will come up for auction.
What does this mean to someone like me whose price target is $12-25? Wonderful buying opportunities internationally and domestically, as long as you aren't picking the latest American-made WS90+ wine or aren't buying supposedly historic vintages like 2007 Southern Rhone (deals on 05 and 06 have been amazing!).
What does this mean to the sub $12 crowd? Not much. A lot more choice in this range as major wineries go downmarket, and offering at better prices than a year ago. But then again, the sub $12-15 category doesn't buy wine in advance and store it anyway.
Mr. Yarrow's article is talking about the tiny wine brands -- so small they have no winemaking facility -- that will go out of business. These small wine labels, for whom the cost of licensing, insurance, barrels, warehousing, and so on, is quite expensive, simply don't have enough float to survive. But that's quite normal and happens often in any year, just more so this year.
To say the industry is on the verge of a financial meltdown is overstatement. It is in a downturn, but every expert I've spoken with believe it's a temporary downturn. There may be a *minor* permanent course correction in terms of prices, but it will be minor.
Obviously, the wineries who are undercapitalized in this market are hit the hardest. Medium-sized wineries going under or changing hands, that's quite normal and happens every year -- part of the dance of ownership in the industry. The larger wineries are capitalized heavy enough that they can survive a downturn.
From what I've heard in the industry here in Napa Valley, ultra-premium wines (the Screaming Eagles of the world) are still being sold briskly. The international market for ultra-premium wine is still strong. Those who are wealthy enough to purchase it still have plenty of liquidity and capital to spend on wine, just not as much as in years past. The wines hit the hardest are the $35 - $100 bracket.
There is good news. Americans are buying more wine than ever before, just buying less expensive wine. Volume consumption is up.
re: maria lorraine
Really interesting thread. This article is also linked within the blog: http://www.sfgate.com/cgi-bin/article...
There have been some huge price breaks recently: Caymus Special Selection around $99, Groth Reserve '06 $89 (Costco), Sterling SVR '06 $26 (Wine Chateau), Simi Landslide '05 $23 (Wine Chateau), Etude $45 (Wine.com), Glaymond Landrace Shiraz '04 $29 (Wine Library) and on and on. Please note that the Special Select was $150 or so, Groth Reserve $160, Sterling's 05 SVR was $73 (from the winery), Etude $95 or so, the Simi Landslide $45 and the Glaymond $60.
There are hundreds more like this.
I've been on Leonetti's mailing list since 1993. Almost every year I've bought my full allocation including their Reserve. This year Leonetti has continued to raise it's prices and as a result will be the first that I have not bought a single bottle from them. Simply, $140 is outrageous for their Reserve-that's $5.00 more than last year. They unfailingly, unflinchingly raise the price on their wine every year. At the same time there is a great deal of competition with wineries such as K Vintner's still selling futures on wines like their Roma en Chamberlain for $50, not having gone up a penny. (A GREAT wine by the way and worth it.)
I still spend more than I should on wine. Two years ago I made a conscious decision with the U. S. dollar approaching $1.60 to the Euro to top a thousand bottles believing that I might not be buying wine from anywhere in Europe for a good while. (Remember when Clio was in the low $30's?) I'd like to believe that with the willingness to buy by the case, even "syndicate" buyers locally to purchase five and ten cases at a time as well as negotiate or buy over the internet, that I have purchased intelligently. But there are more and more deals out there now. Where once the best I could do was 20% off now I am finding half price-on really good wine. I've also found real closeouts at Costco, Wine.com, winechateau, the winelibrary, etc. At Costco, if you are sophisticated-and lucky-you don't even have to buy by the case. (Note: I am not talking about all wine at Costco, only that there are some real deals if you search for them.)
Perhaps there is still a market for some wines as an investment such as Screaming Eagle or 2000 Lafite or Bionic Frog but where I would once nibble at some of this, today I won't even consider it. I think of buying some of this in the way I thought of buying Microsoft at $80 a share or Sun Microsystems at $65. Or GE or GM or Ford or....
Frankly although I'll still buy from K Vintners and splurge on some Groth Reserve most of what I buy is $15 to $30 although the list on much of this might be $25 to $60! I just don't have the level of comfort buying more expensive wine that I once did. Also, to be honest, at the age of 63 it is no longer important to me to buy wine that might cellar for twenty or more years. Ten is fine.
A really interesting and timely post. Thank you.