Wine: Wine industry can adjust to the time, experts say

<p>Wine industry pundits are buzzing over dramatic late-2008 shifts in consumer outlays for wining, dining and traveling, and the impact of the banking crisis on wine-related businesses for the next year and a half.</p><p>Changes in consumer discretionary spending hasn’t crushed the market for higher-end wine, but local growers of the premium grapes that go into such brands need to be prepared for up to a year and a half of squeezed finances as consumers seek bargains, wineries squeeze their inventories to cut costs and a smaller pool of lenders press borrowers harder on their fiscal wherewithal, according to experts at the annual Sonoma County Winegrape Commission market forecast in Santa Rosa on Jan. 20.</p><p>Amid “stunning growth” in U.S. wine consumption last year – reaching three gallons annually per drinking-aged adult in a recent Wine Market Council projection – economic worries have prompted consumers to adjust their wine-buying behavior to the point that the looming shortage of premium grapes early last year could turn into an oversupply if the trend continues through the first half of this year, according to Glenn Proctor, a partner in bulk-wine and grape dealer Ciatti Brokerage of Novato.</p><p>“At the premium end there is a potential oversupply, and at the value end there is a potential undersupply,” he said.</p><p>The brokerage estimates the 2008 winegrape crop statewide amounted to 2.8 million to 3.0 million tons. The state, which is set to release preliminary figures early next month, estimates crop size was 3.4 million tons, compared with the record 2005 harvest of 3.76 million tons.</p><p>At a Wine Market Council conference on consumer trends in Santa Rosa on Jan. 12, President John Gillespie said growth in wine consumption helped keep the wine business from moving from a “tipping point” toward more widespread consumption in 2007 to a “toppling point” last year as consumers trimmed spending.</p><p>“In 2009 we will not reach a toppling point, but there will be a soft landing,” Mr. Gillespie said.</p><p>Projected U.S. wine sales last year were 271 million cases, a 2.1 percent increase from 2007, he noted, citing Beverage Information Group figures. Though that growth was lower than the 15-year average, it was higher than the 1.3 percent growth in the difficult 2001 and 2.9 percent contraction in 1993.</p><p>***</p><p>To address the jitters over the viability of high-end wine in these economic conditions, longtime industry financier Vic Motto, now head of St. Helena-based investment bank Global Wine Partners, analyzed causes of previous financial slumps and their impact on the wine business as a guide to the current recession.</p><p>“There will be blood, but just nicks and cuts relative to other industries,” he wrote in his firm’s January newsletter.</p><p>The downturns in 2001, 1991, 1982 and 1973 had varying factors, including the real estate-caused banking crisis as well as steep declines in dining and tourism of the current one, according to Mr. Motto.</p><p>Turning points came from marketing ingenuity, serendipitous agricultural yields and fortuitous publicity, he noted. Against a flood of inexpensive imports in the early 1980s, California vintners created “fighting varietals.” Rampant inflation combined with the devastating frost of 1972, but the well-received 1974 vintage and the landmark 1976 Paris tasting helped the industry recover. Similarly, the “French Paradox” media coverage in the mid-1990s helped undo a banking crunch in the early part of that decade.</p><p>In short, Mr. Motto argued that wine sales are more affected by marketing than by changes in the economy. Growing wine consumption – from 1 in 4 U.S. adults a decade ago to 1 in 3 today – and low use of advertising compared to other alcoholic beverage categories suggest the long-term growth trend will continue, according to Mr. Motto.</p><p>***</p><p>For wine industry businesses wanting to ease their financial blood-letting, Hank Salvo, a partner of Napa-based Scion Advisors, offers a seven-step action plan for boosting cash and equity to survive the economic recession:</p><p>• Forecast profit based on much lower sales volume. He suggests a “doomsday-ish” 30 percent to 50 percent decrease in sales volume to find budget items to cut.</p><p>• Cull your brand portfolio. Understand your rates of return on investment per wine and hold off on wines that are slower sellers, running up production and inventory costs.</p><p>• Forecast cash flow based on slower arrival of receivables. This can let you know when late receivables will cause a cash crisis with looming payables, important information for talks with banks on financing.</p><p>• Pause capital spending beyond that needed for brand quality and in emergencies. Use up the materials you have before buying more.</p><p>• Keep your most profitable customers happy. Whether it’s the direct-to-consumer business or wider-spread trade account channels, loyalty pays off now and long-term. </p><p>• Get outside advice before making major business decisions.</p><p>•••</p><p>Submit items for this column to Jeff Quackenbush at jquackenbush@busjrnl.com, 707-521-4256 or fax 707-521-5292.</p>