North Coast wine prices on rebound

The deep discounting in wine prices that characterized the last couple years may be coming to an end.

Don't expect bottle prices to shoot back up, but don't expect to find your favorite Russian River pinot noir marked 50 percent off for much longer, according to a new forecast issued Wednesday by an influential Wine Country lender.

"If you've grown accustomed to the good deals, now is the time to buy them and stick the bottles in the cellar," said Rob McMillan, who heads the wine division at Silicon Valley Bank, which authored the State of the Wine Industry report.

With the general economy improving, people are returning to luxury wines even without the discounts, according to the report. Vintners are forecast to sell nearly as much wine as they make this year, meaning their inventories are coming back into balance.

"It's exciting right now because people are coming back," said Christopher Silva, president and chief executive of St. Francis Winery in Santa Rosa. "As an industry, we are moving up from the bottom."

It is a marked contrast from the last couple years when budget-minded consumers slashed spending on luxury wine, and cases of unsold bottles began piling up in the cellars of Sonoma County wineries. Many producers were forced to cut prices just to sell the wine and generate enough cash to stay in business.

Now people are dining out more, and they have begun picking up more expensive bottles of wine.

About 71 percent of wine producers feel their inventory is either in balance or even in short supply, according to the nearly 600 coastal wineries surveyed for the report.

Not all wine areas are recovering equally. In Mendocino County, 47.4 percent of wineries reported an oversupply of wine inventory, compared with 18.5 percent in Sonoma County and 5.8 percent in Napa County.

The net effect is many wineries will stop offering deep discounts by year's end, according to the forecast, which analyzed the market for bottles costing $20 or more. Wineries might even start increasing prices on their most expensive bottles because the wealthiest Americans have largely recovered from the recession.

"We are past the bottom," McMillan said. "It is a very optimistic point of view, but that's where we think we are."

If it holds true, it is great news for growers and winery owners, who represent a large slice of Sonoma County's economy.

The report forecasts wine sales will increase by 11 percent to 15 percent for bottles costing $20 or more. Last year it grew by about 10 percent, but those sales occurred largely because wineries continued to offer steep price discounts. This year, the sales are expected to occur even as the discounts end.

"I don't think you're going to see as many 40 to 50 percent off offerings," Silva said. "It will be more 15 to 20 percent off discounting."

Yet even if wineries stop offering special discounts, many will maintain lower bottle prices set during the recession. That means winery profits are expected to remain thin through at least this year, according to the report.

Those lower prices could spell doom for some wineries. About 7 percent of those surveyed for the report said they were either sure goners or just barely getting by. Those wineries will either find new investors or be forced to sell their businesses in the next 18 months, McMillan said.

But in general, people surveyed reported slightly better financial conditions than a year ago.

Perhaps surprisingly, the best selling wines are forecast to be the most expensive bottles, McMillan said. That's because the wealthiest Americans have fared better during this recession, as Wall Street has largely rebounded, and they now feel more comfortable spending $70 or more on a bottle of wine. The middle class, who usually drink wine under $30 a bottle, are not so lucky.

"We will continue to see declining home prices, and that's not good for the middle class, who had much of their equity tied to their homes," McMillan said.

Around Sonoma County, some wineries have already begun seeing the trend of strong sales of their highest-priced wines.

"Through the downturn, the wines that sold best were our most expensive wines," said Merry Edwards, co-owner of Merry Edwards Winery in Sebastopol.

The cheapest bottle they make is $30, with the most expensive costing $90, she said. Now their wine sales at restaurants are up 46 percent compared to last year, and visitors to their winery are spending on average 20 percent more.

Edwards, whose winery produces about 20,000 cases, said she was feeling good about business this year. That optimism is shared among other high-end producers.

Vintners were the most optimistic about their wine selling for $40 or more a bottle, according to the report. They were least optimistic about bottles selling for $30 or less.

That's because there is still a glut of inventory in the lower-priced wine market, McMillan said, but he expects it will get worked out by year's end as the economy continues to improve and unemployment falls.

Silva said he is already seeing a promising increase in the sale of his wine costing $15 to $20 a bottle.

"Two years ago, the wine buyer at the Ritz-Carlton hotel in Philadelphia wouldn't have talked to me because he wanted to stock something cheaper," Silva said. "Now our old vine zinfandel is flying off the rack there."