Vol. 3 No. 1 First blog of the year and what a year it could be for the wine industry

We are only 19 days into the new year yet a huge number of things that will affect the wine industry already. I will recap some of them from industry sources and my¬† own observations. Here goes:Winery sales – late last year the Vietti winery in Piemonte, Italy, was sold. Having visited with the patron, Alfredo Currado, some years ago, it was with a touch of nostalgia. The good news is this: his son Luca will continue as winemaker and chief executive. That is good news and comes a year after the American, Kyle Krause, purchased another Italian winery, Enrico Serafino. Krause has made a point of letting the prior owners continue to run the winery, and Vietti’s case that is one of producing high quality Barolo’s, and other fine wines. Krause says that it is to have a stake in his Italian roots. Earlier this month Stanley Kroenke, a billionaire who owns both the Los Angeles Rams and the Denver Nuggets and also Screaming Eagle vineyards, bought Bonneau du Martray vineyard, producer of perhaps the best Corton-Charlemagne, and has been owned by the same family since the French Revolution.In Burgundy sales are infrequent, especially one of this pedigree. I believe he too, will not change the operations of the winery.

Just yesterday, a Bloomberg article said perhaps half the U.S. wineries might be sold over the next five years, and recapped the sales mentioned above. This is not uncommon in Bordeaux, especially since 2008, when the Chinese went crazy (there is no other word for it), bidding up the prices of the best cru’s.

But here is the paradox: as wine has increased in popularity, and especially since the billionaires began buying up wineries and land, most producing small quantities that become cult wines, and with the help of flying winemakers and 100-point rating systems the price of the wine goes off the charts. In other words, they can only be afforded by ‘their kind of people’. But as I have pointed out in previous posts, several things have happened on the way to the wine shop:

  • The price jump that had occurred ever since Robert Parker created the 100-point, in reality 50-point system since the first 50 are a given, no longer causes the price of the wine to jump as it once did. While the intent was good, there are so many raters that if you can’t get a 90 from one of them, you should either stop making wine or sell the operation.
  • As commented on in this blog numerous times, globally, good wine is chasing out bad, but as that happens the number of wines in the next higher price group keeps increasing. 2015 was the first year that the fast growing segment was the $10-20 range. Prior to that it had always been the Under $10 category. Once you get above $30 it is stagnant. What is happening is basic economics and now just because your formerly $30 wine gets a 90+ rating, the price no longer jumps to $50, and so on up the wine chain. What’s a winery owner to do?
  • To understand this, we have to go back to what agriculture is in economics: is is a competitive industry where there is no pricing power. When I, in my former life as a wine snob went to ‘an uncle’s winery of a new-found friend, I thought nothing of it. However, it turned out his uncle was Joe Heitz! After spending the main part of an afternoon with he and his wife, I was hooked on this man’s personality and philosophy. What is wine? Agriculture…farming…nothing more, not romantic, and as such no matter what you are able to do, god and nature have the last word. That is humbling to anyone, but especially to people who are dependent on cashflow for their solvency. I came to this realization a couple of years later when I went to work for Merrill Lynch in San Francisco as an institutional bond salesman. Seeking to combine business with pleasure, I contacted all the big wineries…even Mondavi…and the story was the same: you grow the grapes, make the wine, bottle the wine, sell it to a distributor and wait for the money to come in so you can begin another year. Cash is always tight – except for one I contacted: Gallo! Gallo had millions at Bank of America and I saw an opportunity. When I worked for a bank I learned that BofA always…always…had excess cash so they were a SELLER of funds, not a buyer. I moved the banks money to two other banks and earned as much as 25 basis points more on it (0.25%!), and that was on over $100 million a day! So I told the money manager at Gallo that I could help them earn at least 25bp’s over what BofA was paying them. He said, “you know it, I know it, but if I did that even once I would be fired. Fired? You have to remember the relationship of the Gallo’s to their bank, then run by A.P.Giannini and a fellow Italian…that added to trust but mainly A.P.’s word was his bond. I believe at least until the bank was bought by Nations Bank, they continued to only deal with BofA.
  • Now if cashflow is your biggest problem, along with the things that can come up unexpectedly like phyloxera, glassy-winged sharpshooter’s, Pierce’s Disease, frost, late season hail, drought and more, you have to have a marketing plan. As your unsold wines decline your storage costs stop declining with them once you get to a certain level. Do you dump them? In the old days, that was an option but what if you are producing a $100 cab and have 50 cases left? Do you have your distributor take it off your hands or sell it to Trader Joe’s and see it on the shelves for $40 or less? Once that happens it is difficult if not impossible to get your price back up, and as more and more vintners are put in the same position it is akin to the old gasoline wars when I was a kid…and that is not good for the owner.
  • Your other options are to sell to an internet company, and an extremely popular one now is wtso.com (wine till sold out). They manage the offerings so they are up less than an hour but that wine discussed above might have to go for $29.95! But what did the winery have to sell to them for? Another popular option is to sell it to the Chinese. You might even get or exceed your own retail price and that could be the difference between success and failure.
  • Lastly, in ever wine region I go to in the U.S. more and more wineries are springing up. The prices have to be high enough to pay the mortgage, unless you are one of those billionaire buyers discussed above. Sadly, I see some rough times ahead for the industry which increases with the big box stores, especially Total Wine. They are also a threat to supermarkets with wine sections, liquor stores, and boutique wine shops. Now add to this the internet sellers and the price pressure, although they would like to see it go higher, has to, IMHO, decline and it doesn’t make me happy to say that as I believe they need to be compensated for their investment and labor.

It gives me no pleasure to write this having made so many friends in all areas of the wine business, but if you find a wine you like…and I don’t mean Two-Buck Chuck…support them. I, no longer buy any wine from big companies…the last was when Mondavi sold out to Constellation Brands…and the same goes for beer where my favorite was Stella Artois, but now is part of the merged conglomerate SABMiller/AmBev. Strictly craft brews for me from now on. It doesn’t matter one iota but if more and more people take a stand there is still hope.

Even winemakers need a little love…show it to them.

TB