The Coming Carnage?
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?
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.
The big picture is that a large percentage of the larger Napa and Sonoma
wineries is in the hands of corporations which are in no danger of going under.
While all the small wineries in trouble may be numerous, their combined
inventory is small in volume and easy to clear within a year or so.
Expect wine prices to decline by say 25% at the top end and stay flat for
5-10 years, but this is hardly the end of the CA world of wine.
I've been thinking about this but wonder if many wineries, particularly with reds, haven't got inventories that cover more like 3 to 4 years in bottle and barrel. I suppose they can sell juice, but I'd think much of their sunk cost is already in at that point. At least they don't have to keep carrying it and paying on it if they sell juice. What do you think?
I can't speak for every state, but here in CT I am very friendly with my local shop and we often chat about what is going on in the industry. As a customer, I am seeing more $100 California bottles being discounted down big. More wines that were normally reserved exclusively for restaurant biz are now being offered to the consumer. When was the last time you were able to walk into your local shop and pick up some Shafer Hillside or Lewis. Another issue in CT is that the wine distributors are so backed up on vintages that they can't get the more current ones which results in the deep discounts. The restaurants here are not moving the wines. The exclusive wine clubs are decreasing their allocations to their members. On the bright side, I have seen more "negociant" ,sorry for the spelling, wines come into the market. Juice being sourced from a well known vineyard being sold under another label for less.
I received an email from K&L wines about the new release of the Affinity. I called my local guy, he in turn calls the distributor they said to him that the new vintage of Affinity is not on the market yet and won't be until CT sells all of the vintages that they are holding in the warehouse. How do you move all of this wine that is not selling? It's liked a clogged artery. Backs up at the distribution points because retailers and restaurants can't sell it. Brokers are not moving the allocations from state to state. Wineries are backed up with new juice to go to market. What do you do? It has to burst somewhere. Again this is just CT, but I'm sure it is happening in other areas as well.
For the last year, one of the liquor stores in town has been selling various wines for $3.99 (and I'm in a state where 2 buck chuck is $3). Some are pretty lousy, but a lot of the reds are very tasty and were once 15-25 dollar bottles. They are also nicely aged.
Similarly, on my most recent visit to Trader Joe's, I was very impressed by some of the wines I bought. Something called TJs Grand Reserve Cab, was an excellent Napa Valley cab for only around $12. I also picked up a couple of Dry Creek Valley Zins, one less than $10 that was very good. A couple of years ago, I remember complaining that TJs seemed to have few good deals on wine anymore. IMHO that has changed.
The 2010-2011 State of the Wine Industry Report was published this morning.
Here are the bullet points, slightly rephrased:
-- Improving conditions
-- Overall volume consumption is up.
-- Growth in $20+ price points will develop momentum and end the year in a range 8%-12% higher
-- Still *slightly* too much wine at the producer level. These wines will be moved at deep discounts through September to clear the decks.
-- Revenue growth in higher-priced wine will outpace the growth rate in lower-tier wine
-- Best opportunity is still large-scale production of modestly priced wine
-- Emerging improvement in restaurant sales, notably in the white table cloth segment
-- Wineries selling sizeable production above $50 will again find 2010- 2011 a difficult time. Cult, ultra-premium wines the exception.
-- Profitability in family wineries negatively affected, as prices paid for grapes pre-crash are not re-couped with post-crash discounted sales.
-- Growers will get less for their grapes
Two things bother about Mr. Yarrows report. The first is its tone, specifically its use of language that is inflated, tabloid-like, and profane. Granted, a blog has an expected quotient of snark, but words like "carnage," "sh!tstorm," "dismal," and "grim"; and phrases like “seriously troubled times in the next couple of years” and "literally hundreds of wine labels...will vaporize" are not only inappropriate for lending credibility, they’re inaccurate.
And that leads to the second point. Mr. Yarrows quotes two people who work in the wine industry, and uses them as his source of information. He cites none of the many current wine industry reports easily found online, like the one above. Had he done so, his article would have been more accurate and its tone markedly different. Bottom line on Mr. Yarrow’s article: poorly researched, inaccurate, poorly written.
re: maria lorraine
Hi maria lorraine,
I know you know your stuff on these things, so I'm interested in knowing if you found real inaccuracy in those points. I agree that the article is very much sensationalized, and doesn't provide documentation, but Yarrow and his source aren't the first ones to express these thoughts. I doubt I have any personal sources that would match yours, but I have seen many reports, statements, forum posts, and blog entries that would seem to support much if not all of the list in some way or to some degree. I also saw one of the worlds largest winery owners open their employee sale to pretty much anyone who knew anyone...... which would seem to suggest at least an over-inventoried situation.
I'm currently working on a project that required the estimation of wholesale pricing on specific winery product and found it next to impossible to get reliable prices from distributors' and brokers' catalogs due to the 'more than normal' day-by-day discounting that I'm told by retailer friends is going on. Those deals have always been there, but I'm told it's virtually impossible to follow these days.
I'm not defending Yarrow in general. I just didn't find anything much in his blog report that I hadn't read somewhere already.
re: maria lorraine
With all due respect to maria & sources:
"-- Improving conditions"
"-- Overall volume consumption is up" &etc.
Sounds more like a wish list from the Wine Industry than an actual asessment from the real world out there.
True that one can always choose clever boundary conditions that make the above et al. sound plausible.
Like: April 2010 versus April 1910 and so on.
But believable? No way.
Sorry, meant to give the link to the entire report so you can read it yourself and get a feel for its accuracy:
Click on the link to read the entire 23-page .pdf. It's the result, in part, of the SVB Annual Wine Conditions Survey. In the report, you can find and compare data on sales, inventory, distribution, pricing decisions, business models, retail price points, net worth, forecasts and ease of finding credit.
More than one wine industry report has cited increased consumption/volume. It's not a lot -- generally around 2% -- but Americans still drank more wine this year than they did last year. It's just less-expensive wine.
re: maria lorraine
Thanks for the link. It provides a useful and authoritative counterpoint. And I agree that the blog post indulges in overly dramatic prose. Tis the nature of the blog media, I suppose.
But I don't see that the SVB report contradicts Yarrow's central point -- that the small producer of premium wines is in deep trouble. That there will be considerable consolidation in that segment of the market. In fact, the report points out that those producers are faced with a critical need to revisit their business plans since their market and especially their distribution channel is gone.
Beyond that, you have to consider the source. This report is written by one of the financial players in Yarrow's story. SVB cannot be objective. Nice to get some facts and figures from them. But they have a vested interest in glossing over the problems described in the Vinography post. SVB does not want to foreclose on their boutique winery investments, they don't want to have to squeeze some value out of a failed investment by liquidating these wineries in this market. So they surely don't want to portray the problems in that segment of the market in stark terms. But if you read carefully, you'll see they infer that these producers are in big trouble.
re: maria lorraine
I think the stats that maria lorraine points to bears out in the wine aisles of so many stores that traditionally didn't carry a huge breadth or depth of wine selections, i.e., supermarkets and their hybrids like TJ's. My data is strictly observational but I think obvious to so many.
It's common to see just about every TJ's in LA carrying $18-$25 wines next to their usual $7-$10 selections. Particularly seeing actual French champagne as well as sparklers from CA in the $20-$60 range. If you're a long time TJ's customer, who would ever think they'd regularly stock this stuff?
The average supers used to carry wines where 95%+ of the inventory were from major domestic (CA) producers and usually the lower to mid range stuff from them. Now, the $15-$20 wines are very common (the quality is better to boot), the wine departments are so much larger, and wines from all over the world are present, but CA still dominates the inventory. The major producers still dominate - it varies from store to store and neighborhood to neighborhood - but some stores with wine depts run by folks with true interests in wine will offer up a few surprises here and there. If you toss in Bristol Farms and Whole Foods, the selection improves markedly, and even they have greatly expanded floor space share for their wine depts.
re: maria lorraine
Yes, Adler did himself a disservice by dumping out a sensational blog post. At the same time, hundreds of (deserving) labels will vaporize. And I know people responsible for tens and hundreds of millions in worldwide wine inventory who say the situation isn't as rosy as the SoWIR.
As a consumer, I love it. It has been the best buying opportunity in at least 7 years. I am stocking up on more wine than usual...
Very small production cult wines will continue to be successful, however those not as well known are already dumping product. I predict that this will continue as long as the economy is iffy and many will fall by the wayside due to being overlevereged. Owning a small unknown winey is a gamble. Lets just hope we will not have to have lables in Chinese.
There's a huge influx of wine going into China these days (mostly from France and Australia) as well as a whole lot of interest in wine production IN China. But........... my guess is that wineman3 is alluding to the huge debt the US has to China, and how that may play out in the future. Or............. it could just be a concern that a lot of excess US wine inventory could be headed to China with Chinese labels.
http://online.wsj.com/article/SB10001... is from the Wall Street Journal. A really interesting article. I've ordered a case of the "high quality cabernet." (An uninspiring name if there ever was one!) I must note that three of the bottles he's trying to sell are $50 a bottle. Googling this wine interestingly does not return universal rave reviews. Perhaps alternatively I have had very, very good recent experiences with Cinderella wines.
re: Joe H
Not sure your post was meant to reply to mine, but..... anyway.... Cameron Hughes is sold (at least here in California) at Costco stores and also in some regular wine retailers. His business has really mushroomed of late. He's not low-end but is aiming at a high-value niche. Some of his wines I've tried are very good. Others just OK in my opinion. He does get pretty good coverage on many wine blogs and aficionado forums.
Cinderella is Gary Vaynerchuk..., isn't it? He's got a pretty good palate and a remarkable marketing sense.
Yes, Cinderella is Gary Veynerchuk/Wine Library. I've been buying from them regularly for three or so years and have had very good experiences. I should note that I live on the East Coast outside of Washington, D. C. and most wines that I buy from them (north central NJ) arrive the next day via Fed Ex Ground. I would not be as comfortable having wine shipped crossed country nor would I buy during the summer. Still, for the East Coast, for nine months out of the year they are superb. And extremely competitive in pricing with Cinderella representing marketing brilliance.
This by the way is an absolute classic: Gary Vaynerchuk reviewing Costco wine from late '07 http://www.youtube.com/watch?v=tbIH3T...