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Setbacks in Wine Country
As frugal consumers turn to more affordable vintages, strapped North Coast wineries forced to adapt
Tim Olson, co-owner of Olson Ogden Wines in Sebastopol, takes barrel samples while blending a new wine that will sell for less than $20. While the winery's initial mission was to make single-vineyard wines that would sell in the $30 to $50 range, Olson and his partner now are producing more affordable vintages.
JOHN BURGESS / The Press DemocratPublished: Saturday, February 27, 2010 at 3:00 a.m.
Last Modified: Saturday, February 27, 2010 at 10:30 p.m.
The North Coast wine industry, home to the highest concentration of high-end wineries and vineyards in the nation, is reeling from the impacts of a recession that has made it chic to drink cheap wine.
Few are immune from the sea change sweeping the industry, from ultra-luxury brands fetching over $100 a bottle to high-volume supermarket wines struggling to keep prices above $10 amid a flood of inexpensive imports and deeply discounted domestic wines.
“This is beyond a recession. This is a complete resetting of the clock,” said Sebastopol winemaker Tim Olson, co-owner of the boutique Olson Ogden wine brand.
Falling wine prices have affected everything from the value of vineyard land, to how much money banks will lend wineries, to how much wineries will pay for grapes. Layoffs have hit even the strongest wineries, while the very viability of others is in doubt.
“We based our business model on selling a high-end bottle of wine, an organic pinot noir at $55 and $70,” said Gerald Bybee of Bybee Vineyards & Habitat in Sebastopol. “It's hard to make a go of it right now.”
Bybee has been struggling ever since the Wall Street crash of 2008, when his New York distributor backed off a prior agreement to sell his wines. Unable to afford to turn his grapes into wine in 2008, Bybee put the winery on the market for $9 million.
Since then, the asking price has fallen to under $5 million and he's working with his bank and potential investors to restructure the business and avoid foreclosure.
On the block or the brink
He's far from alone. Stories abound in Wine Country about wineries either on the block or on the brink.
There are more wineries for sale now in the region than at any time in his 30-year career, said Rob McMillan, founder of Silicon Valley Bank's wine division.
Not all are in financial distress. Some are in the midst of a generational shift. Others have successful brands that just need owners with greater resources to take them to the next level. But others are selling or looking for partners because they have no choice.
“You really have some significant winners and some abject losers,” McMillan said.
And it's not just wineries. Falling grape prices are affecting vineyard prices, as well. While there haven't been enough sales to quantify the magnitude of the drop, there is softness in the vineyard market, said veteran Sonoma vineyard appraiser Tony Correia.
“Wine prices drive grape prices and grape prices drive vineyard prices,” Correia said.
Manchester Ridge Vineyards, a 30-acre vineyard on a 2,000-foot plateau overlooking Point Arena in Mendocino, has been getting top dollar for its grapes for several years, $4,000 per ton for pinot noir and $3,900 for chardonnay.
But those winery contracts have expired, and now the vineyard's owners' don't know how much their fruit will fetch. After investing more than $6 million to develop the property, they've decided to auction off the remaining 25-year lease next month. Starting bid — $1.4 million.
“This vineyard is at the luxury level of the wine industry, which for the first time has been hit really hard,” said Marc Deprey, president of the venture.
Wine is still a growth industry in the United States. Overall wine consumption in the U.S. increased 2.1 percent last year, to 323 million cases, according to data from industry analyst Jon Fredrikson.
But California wine shipments dropped for the first time in 16 years, falling 4 percent due to competition from a flood of cheap foreign wine, much of it imported by major U.S. wineries.
Wines priced higher than $50 suffered the most, while wines under $9 enjoyed the strongest growth. That trend has put significant pressure on the luxury end of the market. The pain has been particularly acute in Napa, but Sonoma has had its share of suffering.
“It was just an ugly year for a lot of players,” Fredrikson said.
Case sales plummet
Many of those wineries that maintained or even increased prices saw case sales drop sharply. Benziger Family Winery case sales fell 30 percent, while Don Sebastiani & Sons took a hit of 20 percent, according to the companies.
Sonoma County's largest wine company, Jackson Family Wines, declined to discuss results, but industry sources report annual shipments fell more than 20 percent last year.
The wine company, founded by Jess Jackson, stopped selling its flagship Vintners Reserve chardonnay at Costco early last year, around the same time it laid off approximately 170 workers.
Despite the drop in case shipments, the company's total revenues are strong, however, thanks to price increases, spokeswoman Caroline Shaw said.
“Our revenues are healthy, our company is healthy,” Shaw said.
Those wineries that were willing to discount saw their case sales rise. At Rodney Strong Wine Estates, case sales increased 4 percent, with revenue dropping about 1 percent, according to spokesman Robert Larsen.
The winery shaved about $5 per bottle off its top-tier wines, and discounted even deeper to move some of its other labels, Larsen said. The winery's Sonoma Vineyards label, which retailed for $15 when it debuted a few years ago, can be found at Trader Joe's for $5.99.
These larger, established wineries are on comparatively solid financial footing, but newer brands with high debt face bigger challenges.
Banks are pressuring these wineries to put up additional cash or assets as collateral, and some are finding that a difficult task, according to Allan Hemphill, a financial adviser to several area wineries.
“I think you are going to see foreclosures and I think there's going to be quite a few of them,” Hemphill said.
There is broad agreement among analysts about the general forces pressuring the industry. Consumers are trading down to cheaper wine, many finding good values under $20 and even $10. White-tablecloth restaurant sales are off sharply. And increasing consolidation among big distributors has made it tougher for small wineries to get their wines to market, making tasting room and direct sales more important than ever.
Debate over future
But there is fierce debate about whether the industry is in the midst of a mere shake-up or wider shakeout.
Stephen Kuhn, managing director of San Anselmo-based private equity fund Vinum Capital Management, feels it's the latter.
“There are quite a few (winery owners) that are trying to get out,” Kuhn said.
He sees the recession as accelerating the generational shift sweeping the industry, one that experts predict could see more than half the state's wineries changing hands as winery founders retire over the next decade.
The rush to the exits is depressing the prices investors are willing to pay for wineries and vineyards, Kuhn said.
Values for many wineries are falling fast, 20 percent to 50 percent compared to just a few years ago, said Kuhn, who is actively hunting for his fund's first acquisition. For those that are financially distressed, “all bets are off,” he said.
But Robert Nicholson, principal of Healdsburg's International Wine Associates, said the industry remains strong and its long-term prospects excellent despite some softness in the market.
“It's a fallacy to say the bottom has fallen out of the market,” Nicholson said. “Good businesses with good cash flow will always sell at high prices.”
Values remain high
There are plenty of wineries that fit that bill despite the economy, he said. The high values involved in the purchases of pinot noir specialist Kosta Browne Winery by The Vincraft Group or Flowers Vineyards & Winery by the Huneeus family prove the market's inherent strength, he said.
If there is a shakeout under way, it is for hobby and lifestyle wineries that have not gained a strong enough following in the market to carry them through this period of weakness, he said.
Patty Maier thinks the time is right to sell her Saint Helena Road Winery, which she and her husband, Richard, founded in 2000 in the rugged Mayacamas Mountains east of Santa Rosa.
While sales of the 2,000-case brand have been growing, Maier sees trouble on the horizon. Two of her distributors have “gone belly up” recently, and others aren't interested in taking on new small brands. Her wines retail for $49.
The plan had been to pass the winery, which also includes a vacation rental home, on to their sons one day. But while the young men have been involved in the business, they have other interests, she said.
“It's a 24/7 job”
“The wine industry is changing and in this environment, at our ages, 61 and 55, we don't want to be doing this in 10 years. It's a 24/7 job,” she said.
The winery and two homes on the property are listed for $6.9 million.
Jim Rowe Sr. has been trying to sell his Dry Creek winery Pezzi King since last summer with no takers. The 6,500-case zinfandel specialist is on the market for nearly $10 million.
Pressure on prices means the winery has had to manage its operations closely, but it hasn't dampened interest in the winery, he said. At least 16 potential buyers have expressed interest, including investment groups from the Far East and Europe, he said.
“There's no question the industry is getting kicked around,” Rowe said. “But we're doing alright.”
There is something of a standoff in the market at the moment, according to Correia.
The handful of buyers are largely expecting to find great deals, but winery owners are reluctant to sell at such steep discounts, Correia said.
“Sellers think it's 2007, and buyers think it's the 1930s,” Correia said.
Those who don't have to sell are waiting it out. But those expecting a quick rebound in demand or values are likely to be disappointed, Correia said. He expects to see more winery sales in 2010 as the pressure builds.
“A lot of property owners really haven't faced up to reality. They are still in denial,” Correia said. “They think they are going to work their way out of these things, but some of them have dug themselves a pretty deep hole.”
Plenty of wineries, however, are working hard to stay out of that hole in the first place.
By avoiding big investments in wineries and vineyards, owners of wine brands are getting creative to find ways to respond to the market.
Olson, of the 1,200-case Olson Ogden wine brand, said the market was telling him that demand for his $33 to $52 single-vineyard wines would be limited for the foreseeable future. So he and his partner have capped production of those wines and focused on more affordable blends.
Two years ago he launched a $28 syrah that was a blend of Napa and Sonoma county fruit. He's now following that up with a $19 syrah blend from Mendocino County called Persuasion.
“We kept hearing, ‘Give us something under 20 bucks (at) retail,'” Olson said. “The only way we see to grow volume in the current market is to give the market what it's asking for.”
Nancy Walker, winemaker at Vintage Wine Estates, co-founded her own Stephen & Walker Winery label in 2004, releasing her first wines just before the recession hit in 2007.
The wines have been well received and sales are growing, but it's been a slog. The wines start at $28 and rise to $350 for limited edition large-size bottles. Tasting room sales have been slow, with people buying a bottle or two instead of a case or two, which has hurt the brand's cash flow, she said.
“I just did the payroll and there wasn't enough money in the checking account to pay the tasting room staff this weekend,” Walker said.
To save money, she and her husband, Tony Stephen, can often be found behind the bar at their tasting room nights and weekends. While managing her own brand is running her a bit ragged, Walker said she wouldn't have it any other way.
“It's been difficult and I've had to learn to call on strength I didn't know I had,” she said.
You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.
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