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| Total Wine Sales Continue to Move Higher |
About six weeks ago I was asked to speak about the economy, the environment for the US wine consumer, and the fine wine business. The meeting was part of a management retreat for a large wine company and included an acquaintance of mine who we will call "Deep Gullet." It included many of the distributor partners of the company as well so there was quite a wide perspective on the business. This wasn't a client of mine and never will be, but I took the invitation because I thought I might learn something from Deep Gullet and the other presenters. I did and came away with two important perspectives:
- The small 2011 vintage was really difficult for fine wine distributors. Allocations were more the norm for their retail accounts because there just wasn't enough wine produced.
- Attempting to increase bottle pricing - even in an allocated environment has been like pushing a wet string up the hill.
At this stage, we appear to be tracking well to the overall growth estimate but will have to wait to see sales results for Oct-Dec to see if we were correct in our annual prediction. After exchanging some G2 with Deep Gullet we discovered we were of the same belief: What is clear at this point is while wine consumption continues to increase in volume as seen in the lead chart, GDP is stalling and the middle class aren't able to fully participate. Yes .... Americans like wine and are drinking more in volume, but they aren't paying more in price to support winery production cost increases. The following chart is really descriptive of that point.
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| Source: Nielsen Beverage Group |
My friend Danny Brager from Nielsen presented the chart to the right recently at a conference in which he was speaking. While all F&B categories are up 1.7% in price on average, wine is only up 0.20%. Consumers aren't accepting price increases for wine or spirits for that matter. The economy isn't supporting price growth and inflation seems to be well in check. I'll spare you the in-depth analysis of what's happening in the country that's holding back economic growth but here are some high-level bullets:
- Housing has indeed recovered most of its value now which is a huge help to the middle class... should lead to a bit of a wealth effect and release pent up demand in sectors, and allow more movement between jobs in different regions. That should have helped support a better second half of the year as I'd thought, but now I have my doubts because of higher interest rates and Sequestration 2.
- Youth unemployment rates are still very high in the main industrial countries of the world (Yes Virginia, the Millennials aren't reading the press about how they are driving growth in wine sales. They are a big cohort but have no income.)
- Boomers are hitting retirement age. They drove the growth in wine since the middle 90's so that is a big accelerating headwind in the face of fine wine purchasing.
- The wealth gap is widening. The wealthiest Americans have recovered their pre-crash wealth and are spending. The middle class while improving off the bottom, need real work to spend and while the unemployment rate continues to decline, the US labor force is shrinking. There are fewer people working than before even if the unemployment rate is falling.
- The Fed announced last week they were postponing tapering. While the markets loved it, the reality is we are careening to another 'fiscal cliff' on funding and proving the S&P upgrade of the US credit rating earlier in the year might have been premature. What the announcement means is the economy isn't doing as well as the Fed would like and they are going to keep throwing economic crack at the market until they are a little more certain there is a recovery. In the meantime however, the long bond in the US has gone up dramatically since May and that means the middle class is less able to afford the houses to which they were aspiring. We see that in the sharp decline in new mortgages application rates.
Now move to grape and wine prices over the past 2 years. With most predicting a grape shortage by April/May of 2012, growers began to recover pricing that had been depressed since the recession started. Then we had the 4MM ton harvest of 2012 and the shortage - to the extent there was one, went away. Since non-bearing acres are so low and planting stagnated in the last decade - not even keeping up with vine replacement, most wineries looked through the heavy 2102 crop and still were willing to pay higher prices this year. With the the 2013 harvest now well under way, tanks are full and there is still a lot of bulk wine for sale. It looks like the harvest is coming in large once again.
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| Prices Have been Dropping as Volume of Bulk Increased |
So where does that leave us with grape prices? Add it up:
- Current 2012 Bulk Prices are flat to trending down
- The economy is not seeing the growth I'd hoped for in the back half of the year.
- Consumers haven't been willing to pay more for wine and based on the recovery sluggishness, I can't see them willing to pay more going into the holidays or even 2014 at this point.
- Producers have been paying more for grapes and getting their margins squeezed because the costs can't be passed on.
- Supply isn't short for wine right now, and it looks like we'll have two back to back large harvests.
That leaves me and Deep Gullet to believe we won't see new grape contract price increases in 2014. Taking all the factors that impact price into consideration, the only question at this point is longer term supply. Are there enough acres planted? Should grape buyers look through the the large 2013 harvest again and view 2014 as likely short? If some of the higher tonnage of the past 2 years is a result of changed farming practices - and there is that possibility - we may not be as short, even in the long term as many have predicted. In the meanwhile while we ponder the balance of grape supply and demand, there are plantings taking place.
My conclusion is all things held equal, at the end of the 2013 harvest we should see downward pressure on grape pricing.
My conclusion is all things held equal, at the end of the 2013 harvest we should see downward pressure on grape pricing.
I think it makes a lot of sense. Government expenditures have also cut back, ie the sequestration and demands to cut more in Washington, and that lower stimulus is hurting the economic recovery. We are heading into stall mode and who knows when it will move forward, we could keep shrinking.
ReplyDeleteThanks Anon 8:31. Personally I don't QEx is doing much if anything for the economy and wished the Fed would have just matched market expectations and started the wind-down. The stock market loved it but what we really need is earnings in business to sustain the market and inprove job prospects.
ReplyDeleteSequestration wasn't as big a deal as the market thought at the begining of the year but it's just one more negative thing to focus on along with Obama Care - when we should be focusing on raising the job participation rate.
I love chart porn, and the bulk wine graph and chart show the reality of supply and demand very well. It appears the Sonoma/Napa volumes available are where they were after the 2009 harvest--when the impact of the financial crisis was resounding through the wine market. I have to believe some sellers have been holding out for offers they never got. We'll see what North Coast rain does to the 2013 supply.
ReplyDeleteThanks for logging in Pinotgraves and offering your thoughts. A few years ago there was a large sign on Highway 29 that said, "Grapes for Sale." It was a bummer to see that because I don't think it really expressed the true state of the business at the time, though the press seized on it and it was in the Napa Register. Yesterday I got a picture emailed me from someone in Glen Ellen showing a similar sign tagged up on a pole offering merot for sale. In fact if you look at the press, news from Ciatti and Turrentine, the above chart from Ciatti showing no upward bulk wine pressure, Wine Industry Classified, and Wine Business Daily to name several - there are consistent indications of excess grapes presently on the market looking for a home. Again, that doesn't answer the long term supply question and it doesn't speak to regions or varietals very well, but on the whole - its clear today we have enough winegrapes AND generally speaking there isn't an opportunity to increase prices through 3-tier.
DeleteRob, doesn't the price increase chart speak volumes, and especially the bit about spirits? I don't think it's any coincidence that the biggest drinks companies are pounding the market with new products and line extensions, increasing supply. And what happens when supply increases?
ReplyDeleteWC - My favorite low price advocate!! Thanks for logging in and commenting.
DeleteYou are referring to retail pricing I believe. But either way, when supply increases, it still depends on what the relative supply of grapes are, and what is happening with demand. Coming off an allocated year selling the 2011 harvest, distributors still had some work to do with getting sufficient supply for the wineries they represented. In addition, the 2012 crop while heavy, is being touted as one of the best ever in the US. Many are waiting with baited breath .... (isn't that a strange saying?) .... for the 2012 release into the market. At this stage looking at retail price in 2012, considering thet relative price for wine already dropped in the recession and didn't recover, its difficult for me to say we should categorically wine price decreases in the 2012 vintage. I can't see consumption growth either as noted above so don't expect any support for price increase in the vintage.
When we do release the 2013's, we have a different ballgame. Distributors have greatly increased their days of inventory this year to make up for the short 2011's. Unless the consumer spikes purchasing, I don't think the distributors will be taking on the 2013 vintage like they did the 2012 vintage. They needed the 2012 vintage. Will they need the 2013 vintage in terms of the amount produced and price required? My crystal ball is a little foggy on that prediction but if things continue to trend as they are, I will lean to more promotional allowances expected in 2013 and marginally lower prices in specific price tiers. That said, recognize the harvest isn't even in the barrell so its a really early WAG.
Hello Rob
ReplyDeleteI am not sure the sky is falling yet. Some of the grapes for sale we are seeing now are due to overages and capacity issues, So I think we need to be careful before we draw comparisons to 2009.
What makes this business so fun is all the ways mother nature can change some of our assumptions at a moments notice.
Glenn Poctor is in the house ladies and gentlemen .... .....!!!
DeleteGlen, since you are in the house, I've been wondering when the Ciatti Company is going to change their name the Proctor Company? I mean Joe has been working with the Zepponi Group for how long?
OK I'll stop.
When it comes to the present perspective on grape prices and volume, I would never disagree with the Ciatti Company or my friends at Turrentine Brokerage. Looking at long term trends however is a different thing. I can have a different opinion because I weigh the factors impacting longer term supply and include demand factors to make a guess on supply and price.
I'm not doom and glooming. Actually I am acknowledging the runup in grape prices over the past few years that returned price per ton to something more sustable for growers. I do note the current period stabilizing of price, and I am suggesting based on what I seem, that if the harvest comes out particularly large again, there will be downward pressure because distributors have sufficient inventory in their warehouses.
Note I stopped way short of talking about the severity of the pressure or from using hyperbole to fan the flames of debate or sell a bias I might hold. What we are all looking for is right size vineyard planting/investments relative to winery demand for grapes, and right size grape price/volume relative to retail demand. As you you told me in the past, it would be nice if they lined up at the same time but they never do. We'd have nothing to talk about then!
I completely agree Rob. Another major downward pressure on bulk is the overpricing of CA wine in general. As GenX/Millenials become more of a force, $$ wine doesn't hold the same cache for them as it did the Boomers. Everyone is scrambling to make a $100++ bottle to sell to the 1%ers, but that microscopic pool is becoming exponentially crowded. Prices will have to plateau as result.
ReplyDeleteSpeaking to the situation here in Napa, there is some danger in the premium++ market. 2010 and 2011 were small yet very poorly rated vintages. Even though there is less inventory, pull-through for these two weak years back-to-back will be an issue followed by a huge/highly rated year. If wineries don't plan accordingly, I expect initial orders for 2012 will be much smaller than expected and/or you'll see large scale discounting of 2010/2011 to compensate, leading to a possible glut when 2013 tries to hit the shelf.
707WG - Thank you for logging in!
DeleteWhat I can tell you is the wine inventories were actually low because of thet weak vintages. They are selling through. 2012 is well received and needed.
The question is about 2013 which should be another big vintage. Now that the 2012 has made up for 2011 shortages, will 2013 have a harder time moving off of what is a great 2012 if its almost as large as 2012. (depends on how 2013 turns out of course in quality) Back to the point, if it does get stickier selling 2013's, does that depressurize the need for fruit in 2014 and can that be an average or below average year and still not impact supply need. I still get back to price again being flat to slightly lower in that circumstance unless the economy starts to take off.
I think this gives lie to the ridiculous argument that I increasingly hear repeated in California that imports' market share has steadily increased only because California can't grow enough grapes to supply demand. If that were so, California grape prices would show steady price increases at or above the rate of imported wine sales.
ReplyDeleteImport market share is increasing for the very simple reason that demand for those wines is increasing at the expense of demand for domestic wines.
Unk 1:08, thanks for offering your comment. I would say you are partially right. Demand for foreign wines are on the rise at the expense for domestic, but planting enough grapes is a subset of the discussion.
ReplyDeleteThe issue is one of value when the consumer makes a buying decision. California can't grow grapes economically at the lowest price points anymore because of the strength of the dollar relative to other importing countries, and the difference between land costs here and alternative land uses.
At the high end of the market there is a similar dynamic. The consumer is still looking for value and many foreign countries can make as good or better wine with their own impacted currencies giving them a market advantage.
I see many who seem to think this is a money grab by domestic producers and they are charging ridiculous higher prices for their wines because they are elitist snobs and holding consumers hostage ... they may be even in the 1% .... maybe their parents were communists!! (OK .... not that far.)
Anyway, wine prices here reflect a market that includes very high costs of production and foreign producers largely have an advantage there. Take a look at the blog post here titled "How much do wineries make." You will be surprised to find out the answer is, not as much as you might think.
Domestic wineries will continue to focus on making the best quality wines they can and foreign wineries will do the same. May the best wine win. Thats what the consumer is voting.
Viewing it solely against European wine, I wouldn't necessarily call the dollar strong against the Euro, Rob. It's floated in the 1.25-1.35 for quite some time now. In fact the Californians have actually benefited from the Euro structure since, in its absence, certainly the Greeks, Italians, Spanish and Portuguese and possibly even the French would have seriously devalued their currencies against the Dollar.
ReplyDeleteAnother interesting look is at the four year window from 2003-2007 when the dollar absolutely crashed against the Euro (going from around $1.15/E to as weak as $1.65). Even at this stage, import (and European specifically) wine gained market share each year.
The above tells me that this is primarily being driven by changing consumer trends that are so strong as to negate underlying economic trade theory.
Rob,
ReplyDeleteA question for you. In your comments you talk a great deal about the Distributors having taken on the 2012 vintage, like it was a thing of the past ("Distributors have greatly increased their days of inventory this year to make up for the short 2011's. Unless the consumer spikes purchasing, I don't think the distributors will be taking on the 2013 vintage like they did the 2012 vintage. They needed the 2012 vintage.")
What % of 2012 wines produced have even been bottled, much less released? Do distributors already have sufficient inventory in their warehouses? If so, and if the majority of 2012s have yet to be released, isn't that fairly significant problem>
Thanks,
Adam Lee
Siduri Wines
Adam - good catch. Blog-osis here. I was thinking though the supply chain and didn't say it right. The 2011's are currently in release and we are going to the 2012's soon. I don't think there will be any problems selling the 2012's to distributors. I think I did a more credible job of explaining the point in the subsequent week's blog: http://svbwine.blogspot.com/2013/09/inventory-days-higher-grape-prices.html
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