What’s Going on With the Price of Wine

I finally caught up with a replay of Rob McMillan’s Silicon Valley Bank (SVB) webinar presentation of their own 2011-2012 State of the Wine Industry report. Rob is founder of SVB’s Wine division.  His presentation was not really a state of the wine industry report since the bank and its research are only concerned with the U.S., west coast, fine wine industry.  Moving beyond the fact that the report title smacks of US arrogance and an insularity associated with the George Bush presidency, the data is very encouraging if you are a domestic wine producer; price increases, reduced discounts, increasing demand, settled inventories, stable fruit prices, and increasing margins. Here is the summary look:

Domestic US wineries lowered prices in 2010 using various allowance and promotional tactics to balance inventory.  SVB’s research indicates a bifurcation in the market with anticipated 2011 price increases in the $41+ categories and continued price decreases in the $15-$40 end of the market.  SVB points to general spending strength by affluent consumers and the steady unfazed demand in the cult/limited inventory category to support this bullish pricing outlook at the high end.

But the domestic focus and global arrogance of the SVB report fails to address a core issue that is creating lasting systemic problems for their domestic wine constituency: COMPETITION.

I just finished looking over Robert Parker’s report on “Top Values” in the 8/31/11 issue #196 of the Wine Advocate.  It contains separate lists of American and European value wines, all selling for <$25, that he tasted over the last six months. Parker supplied a preamble and perspective to the lists:

“One thing that has been on a clear upward trajectory over the last three decades has been the increasing number of interesting wines that can be found for under $25, some at remarkably low price points of $8-$15. Such bargains rarely existed years ago, but today they are abundantly available. If you want to prove their value, insert one in a blind tasting against wines made from the same grape or grapes that cost five to ten times more per bottle and see what the results are in your tasting group.”  —Robert Parker

With the emergence of smart importers like Eric Solomon, Neal Rosenthal, Louis/Dressner, Terry Theise, and so many others, small winemakers that never dreamed their wines would be discovered outside their villages or countries are now blending exclusively for their importers and the US market. They are selling a lot of this wine for less than $20.  Parker did not do a complete job in his report on the international value list since the wines were limited to Europe and primarily two importers; David Shiverick and Peter Weygandt.  Still, the report tells a story that the US wine industry needs to come to grips with:

Of the 78 domestic wines reviewed by Parker, 13 (15%) scored 89 points or higher

 Of the 90 international wines reviewed by Parker, 51 (56%) scored 89 points or higher

While Parker’s report is not scientific nor conclusive, it is completely reflective of what savvy wine drinkers have discovered; the US industry has done a poor job producing quality value wine while importers have flooded the US market with once undiscovered high quality value European wines.  SVB says the ongoing price pressures at the low end of the market is symptomatic of ongoing economic woes of the category’s target consumers.  SVB points out the current irrelevance of the over-hyped millennial generation that plays mostly at this lower market level, and urges the fine wine market to refocus on boomer and Gen-X consumers who are more prone to purchase at the higher end of the market.

As long as California and Washington fail to produce authentic quality wines in the $10-$20 category there will be price and inventory problems.  The bank ought to advise their clients this way.  Of course, it’s not their job to tell their clients how to make their wine.  Even if it was, how would a bank that only operates in a slice of the US market and refers to their report as the “State of the Wine Industry” be able to comprehend the global impact on the health of the California wine industry?  I have not found a sub $20 California wine that I would prefer over equally priced wine from Cotes du Rhone, Muscadet, Vouvray, Bierzo, Languedoc, Beaujolais, Provence, Friuli, Suditrol, and elsewhere.  SVB should stick that opinion in their reports.

Overhead, market structure, and farming economics attached to West Coast winemaking appear to get in the way of low cost/high quality wine success.  The idea that failure in the low end can be offset at the market’s top end with continued growth and price escalation appears unsustainable.  Runaway Cabernet prices since the mid 90′s took me out of the domestic market as I refocused on higher quality, more attractively priced international luxury wines. The US wine industry needs to admit their failure in the quality value market segment and start figuring their way out of that before they price their golden geese to unsustainable levels.

  • http://twitter.com/brewnoser Jeffrey Pinhey

    Always enjoy your thinking, Adam. Good read, and thought provoking. I am in total agreement with you when we look at where real wine for affordable prices comes from.

  • http://twitter.com/SVBWine Rob McMillan

    Thanks for the observations on the report. For clarification, the the US wine industry is largely a West Coast business, about 91% of all production so its a fair title to use and hardly insular since its about the US wine industry versus the world. Surely you must be joking labeling the report arrogant and bringing Bush II into the discussion, but I voted for Obama if it helps? ……. and don’t call me Shirley.

    Anyway, the reason we don’t talk about foreign competition in the report is its not an important facet this year relative to the other issues faced. In past reports we have talked about your observation. In fact several years ago we noted the Central Valley of CA needed to be careful with the low end of the market because it was becoming a commodity, and commodities are produced anywhere with lower land values and unit labor costs. That’s what’s happened to a myriad of US crops over the years like cotton, sugar, pineapple, etc. Since that report over 100,000 vine acres have been removed from production. Today the CV of CA is doing well in the face of a weak dollar and making good value wines in wide acceptance with sustainable economics and the WA wine industry is doing a very good job as well serving the space you note (Check out Columbia Crest Grand Estates wines for some nice values).

    The fact other countries can produce luxury wines of better value is a red-herring. Luxury goods are more price inelastic; an upward move in price doesn’t have the same impact in volume purchased versus a non-luxury good. There was a day when the same argument was made about the US who made as good of wines as France at substantially lower prices. But the French wine industry has survived somehow. They make great wines and wine lovers who can afford their wines will still buy them, right along with the US wines that are now higher priced.

    There is room for Argentina, Spain and other countries who produce good value wines at lower prices The economics work for now, allowing them to produce those wines but those economics wont last forever either. As our younger wine lovers grow, they will use those wines as a bridge to discover the other more expensive great wines produced in the US and other world regions, and as its been for decades, we will still find good imports at good values from other newer and emerging regions.

  • http://twitter.com/SVBWine Rob McMillan

    Adam – I don’t dispute your perspective on value wines from off-shore. If you add the world together, there is more good value wine produced than the US, but there are good values out there of domestic origin too and it’s not as dire a picture as you paint. Using the Wine Spectator Data base, nearly 1,000 wines are produced with 89+ ratings and of those, 10% are from the US; more than those produced from Germany, Spain, Portugal, Argentina, Chile, and New Zealand. It doesn’t change your correct point: There are more value wines produced in the world than the US, but there are many very good values made here.

    I recently found several very good wines produced under the Vintjs brand at Trader Joe’s. The Napa Valley Sauvignon is $5.99 and is a very well made wine with both citrus and french oak; rivaling many +$20 SB’s I’ve tried. Also, the pinots from the Santa Lucia Highlands in Monterey, CA. and the Willamette Valley in Oregon are both very nice wines under the same brand. The 2007 Genesis Meritage from Hogue I found a particularly good value containing all the noble Bordeaux varietals and selling for around $10 a bottle.

    The cheap imported hand-made wines you are buying either have come from regions with lower land costs such as Australia, Argentina, and Chile, or are produced from the EU which has artificial production levels because of tax subsidies. Our producers don’t get the tax subsidies of the European Union.

    In 2006, the EU commission noted there was a 2.5 billion liter excess of wine; half of which was due to farmer subsidies. The EU was on the one hand paying farmers to grow grapes that couldn’t be sold, and then guaranteeing them a market by distilling the excess wine. In that kind of a market, you will depress market prices paid for grapes and those costs will end up in the price chain to your table in the US.

    Today the EU is taking a little more reasoned approach and has ripped (by offering a subsidy) 4% of the producing vines to try and reduce the excess. That said, they are still subsidizing their wine markets with over €1.5 BN annually, which is approximately $2.2 billion USD. A third of that is going to distillation still, a third to “vine-grubbing” (removal programs), and the rest for various programs including marketing and export subsidies, programs which help some of the wines you talk about get to your table and thus advantaging the foreign producer in our own backyard.

    So the issue of competitive US wine pricing 1) its not quite as bad a picture as you paint and 2) is a little more complex than presuming the growers and producers are just arrogant and insular, ignoring the rest of the world. Using a term from our arrogant former president Bush, our country is a pretty competitive lot and we have some of the best “strategery” in the world. If it can be done economically here, it will be done.

  • adamjapko

    Rob,

    Appreciate your thoughts and thanks very much for making your valuable and useful domestic research and analysis available to everyone. I probably did over dramatize the insularity of the report title and offered the Bush side swipe only because I come to your content as a consumer and follower of fine wine. Fine wine is a global business. So from my perspective, a report labeled “state of the wine industry” that only focuses on the US sector lands awkwardly with me. And, since the main point of my post is that Europe has a headlock on the US in terms of their ability to produce authentically delicious wine in the $10-$20 category, the absence of America in your report title, or any reference to imports in the content, made it simple for me to overlook the legitimacy of the fact that your client and prospect base is purely domestic. So I apologize from your point of view and ask you to understand mine.

    Secondly, I agree with your sole value suggestion on Columbia Crest Grand Estates. I give it a try almost every vintage. Here you will see that I went through 8 cases of the 2000 CCGE Cabernet, the best in the last dozen vintages. CCGE along with Castle Rock’s Pinot Noirs show a consistency in value and quality that is mostly absent in California. From a consumer’s point of view, what a shame that we have agreed to the one or two top value domestic producers. There should be hundreds, but there’s not.

    As a consumer and collector or fine wine since the eighties, I dont see the low end of the market as a commodity. Taste the recent Beaujolais, Muscadet, Vouvray, Cote du Rhone, Languedoc, and other value producing area releases. The under $20 category is alive and full of world class wines, not inauthentic commodity juice. For savvy buyers, that global quality value pool is noticeably empty of US wines.

    California Cabernet (forgetting about the cult wine effect and sparing a few others), is not worth $100+ in the context of global quality options. Maybe it’s the right price point for producer economics, but certainly not for consumer economics since you can generally find better wine at lower prices abroad.

    I just sold a bottle of 1986 Chateau Lafite for $1,800 because it is not worth that much and I only paid $75 for it. It went to a chinese broker. I have to believe that the emergence of China and increasing export opportunities are driving Bordeaux and other parts of the French wine industry. I dont think its fair to look at France’s current market dynamics to justify historically higher prices and legitimize it as a framework for the US wine industry.

    It seems we hold separate points of view mainly because you are rightfully serving the economics of your client growers and producers and I see things from an educated consumer’s view to purchase the highest quality fine wine in the most cost effective fashion. I guess if there were more folks like me, and our consumer niche had more clout, things would be more painful for parts of the domestic wine industry. And, if your clients continue to push prices of top wines to the full extent of their elasticity and continue to under-serve the quality value segment, then consumers will suffer.

    Maybe we are exactly in the right place; California producers should push price on their best wines whenever and as far as they can, forget about the sub $20 value category. Why focus on $10 wines when it costs almost as much to produce as a $100 bottle. Educated consumers like me can continue to refocus on European imports at the low end and on $50-$75 world class, old world imports that offer better immediate drinking and age-ability than domestic product.

    By the way, I loved the Exploding Warrants imagery in the presentation. Thanks for keeping the webinar real and including the always amusing and engaging Paul Mabray. I hope despite the distance between our points of view, I will receive another invitation to the next State of the (US) Wine Industry report.

  • adamjapko

    Jeff, it’s amazing to me that so many smart winos like you understand this but the issue sits undercover and rarely surfaces as a critical issue for the American wine industry.

  • Anonymous

    Rob (aka Bill Kreutzman), great background info that offers perspective and more detail around my original thesis; there is better wine to be had at $10-$20 from old world producers than US producers.

    One giant point of correction though-it is a mischaracterization of my original comments to suggest I have labeled US growers and producers arrogant or insular or ignorant of the rest of the world. I was referring to your report titled “State of the Wine Industry” when it should rightly be entitled “State of the [US] Wine Industry.” Most of the winemakers I know had their original inspirations outside of our borders.

  • http://twitter.com/SVBWine Rob McMillan

    Adam – Thanks for the clarification.

  • Paul Reis

    My understanding from reading European news publications is that Rob’s statement <> is indeed accurate. I think this is a critical component to pricing and competition. Adam, what are your views on this? Should the US government begin subsidizing our winery industry in order to bring them a step closer to being able to compete with Europe’s wine producers?

  • Anonymous

    Paul, no denying the factors you and Rob outline, but I am completely against government subsidy for any US business sector. We somehow manage to compete in other industries with France and Italy where government subsidies and government owned companies exist, we need to be able to do that here too.

    Are EU subsidies really the central issue why we dont make much artisan level wine for less than $50 anymore in this country and can’t compete in terms of quality with the Europeans? The price of new release high quality wine in the US went from $15-$50 for excellent Cabernet in the 80′s to something like $60-$175 in the late 90′s and 2000′s. That is when me and lots of other wine enthusiasts stopped buying California Cab and looked for lower cost replacements but couldn’t really find any. I would be curious which issues drove that price escalation in your opinion? Did it have anything to do with our own market froth, over investment, debt, mergers, etc? If Caymus or Mondavi Reserve or Montelena or Phelps level quality wine was still selling for $20-$35 a bottle as it did in the late 80′s, there would be no grounds for disappointment in domestic wine industry performance from the enthusiast point of view.

  • Christian Miller

    I’m wondering if the disparate views here are actually the result of the distribution system. Adam, I can’t quickly tell where you are located from the website, but I’m guessing the Northeast, probably the NYC region. That area has a plethora of small importers and retailers with direct-import ties, that bring in many good value and distinctive imports in the $10-30 range. California wines are infrequently distributed using those methods in the Northeast. More conventional distribution in the Northeast appears to favor large volume corporate brands and high end “blue chip” wines. I have noticed on my trips to NYC and DC that I rarely run across many of the high value $10-30 wines that easily available in California; wines from small local wineries, obscure varieties or appellations, second labels and so on.

  • Anonymous

    Christian, great points about distribution impact on availability. You may be right, direct imports favor small importers and the northeast and scarcity of low priced quality CA wines that distributors aren’t working here create this imbalance.

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