I get this magazine called American Vineyard which is usually a quick read, but the December 2010 issue really caught my attention on a subject that has had me wondering for a long time. How is Washington going to compete in a very narrow market for wines over $15? Yes, I know the Washington Wine Commission said there is no limit to the price you can charge and as long as you charge enough, there is no limit to the amount of wine you can sell at these inflated prices. The recent fall of Whitman Cellars and Olsen Estates might point out this fallacy. They were both limited production operations, somewhere around 5000 cases, but at $40 per bottle, they penciled out to 2.4 million dollar per year operations. The banks bought into it.
Then the crash hit. Wine drinkers found out that they can get good wine for under $15 - in fact a lot of those $40 wines on closeout. Folks, wine drinkers are never going back. The American wine consumer has matured. Wine magazines, competitions, wine societies (the members now arrive in walkers and wheelchairs), Bobby Parker, et al are passé, caput, finito, done. For those of you wineries waiting for the rebound, the tooth fairy doesn't exist and there is no Santa Claus, either. Sorry to have to be the one who told you.
How does the 'Rule of 100' work? According to the article, 'SJV Winegrowers Cheerful' (for those who don't know, the SJV is California's biggest wine region and the source of Chabless, Hardly Burgundy, and Two Buck Chuck.)
The rule of 100 works like this: if you pay $100 per ton for grapes, you need to charge $1.00 for your wine, $300 for grapes and $3.00 for your wine and so on. Since most wine is selling for under $10 per bottle, the most a winery can pay for grapes is $500 per ton if they sell to a distributor or $1000 per ton if they sell through the tasting room only.
This is how it works for the grower. The San Joaquin Valley grower produces 14 tons to the acre on a highly mechanized block of grapes. He get $400 per ton or a yield of $5600 per acre. The Walla Walla farmer hand prunes and trims to 2 tons per acre and gets $3000 per ton for the grapes yielding $6000 per acre. The growers are both making similar money. That's fine and dandy.
The wineries are a different story. The mega winery in Modesto can sell its wine nationally for $4.00 per bottle (or less because of the scale of the operation). The Washington winery has to get $30 per bottle and sell it within the state because they lack national distribution. If it is sold by the winery directly to retail/restaurants, it hits the shelf DOA at $44 per bottle. (Handcrafted, ultra premium, award-winning, Wine Expectorator score 95, blah, blah, blah, just like every other bottle on that shelf.)
The most a Washington grape grower can hope to ripen every year in a warm area like the Rattlesnake Hills or Horse Heaven Hills is about 4 tons to the acre. Working this backward from a needed $6000 yield per acre, the grower must get at least $1500 per ton for grapes. The winery must get $15 per bottle, so it hits the shelf at $21.50 (self distributed) which is not a good price point, but $14.99 at the winery tasting room will work - assuming your tasting room can sell a couple of thousand cases per year.
Looking into my cloudy yet crystal ball, I see the Washington wine industry shrinking dramatically. There will be spectacular failures like Whitman Cellars or quiet closures like Olsen Estates. I see the amount of land dedicated to wine grapes leveling off or even declining.
I see wine tourism (visiting wineries in real wine country like the Rattlesnake Hills or Red Mountain - not 'park and drink wine villages', strip malls, or industrial parks) continuing to do well and you will see more wineries using the wine bar concept (sell your own wine in a bar atmosphere) in order to sell their product directly to the consumer at a good profit. I'll call that the 'brew pub' model.
It's not about the wine, it's about the experience. Wine is just another food commodity. Would you walk down row of industrial roll-up doors to taste over-priced canned green beans? I hope the Washington Wine Commission gets it someday.
Have you been texting with The Farmer or Facebooking with him recently!?! He stands on his soap box in the middle of Carneros Avenue and with a fire in his eyes delivers this line over and over again, "Wine grapes are a commodity, people!" sometimes it gets the attention of the tourists trecking through on their rented bikes, other times he gets told to get outta' the road by the red truck brigade (BIG AG Vyrd Mngmt Co. in the area)
ReplyDeletePost more often, more people need to hear from you grumpy old timers. Believe it or not, some of us youngsters listen.
Gail, a very intriguing post. I'd like to hear your thoughts on exactly what the Wine Commission should be doing in order to further the development of a financially sustainable wine industry in this state. This is a very good topic for in-depth discussion. Keep on grumping!
ReplyDeleteWhen talking to my wine geek friends, I hear the same retort to my unflagging claims that WA wine is the best in the country: "Yes, but it's too expensive and you can't get it outside of the state." While not 100% true (I can get it in select places here in Tucson), it is rather pricey. I have always lived by the maxim "With wine, as in life, you get what you pay for." The biggest fans of WA wine are the state's residents of course and they don't allow much past their borders. Perhaps that should be worked on and improved. As in all economics, you need more customers. I like the blog!
ReplyDeleteAs even grumpier old winemaker, the above snarl rings true to a point. The SJV grower is getting $400 or less for his grapes but not the 14 tons to the acre, 6 to 8 tons is more normal for commodity reds so that $5400 number is more like $3000 which is close to the cost of farming so we tread water for another year, but then we just do it for the lifestyle anyway and live off our CD's. Even worse is the OV Zinfandel grower with head trained vines that require all hand work and 4-5 tons is great crop and really needs at least $700 a ton to break even is really only making it if he/she inherited the land. The fact is the grass is always greener across the state border but things are not that lovely down here and the only one making money are the government and the mega wineries.
ReplyDeleteThe reality lies somewhere in the middle. Not all growers need to overcrop in order to survive. Conversely, not all Washington wineries are justified in asking $40 or more retail per bottle. I do believe, however, that there are small, hand crafted, artisan wineries with longevity that are asking a fair price for their wines. Yes, much of our industry rests on perception, but ultimately the proof is in the bottle that only the restaurant somm, retail buyer and/or the consumer can decide. To that end, there are very small, Washington artisan wineries that make a genuine effort to create a presence for their brand outside of Washington State. Ultimately, it is the consumer, not the press, who decides what epitomizes quality from Washington, regardless of the price.
ReplyDeleteGlass half-full here… I think consumers who know Washington wines, and especially us in the industry, know there is value on top of quality in many of our wines. I see and hear there is a market for $20 (retail) and under rather than $14 and under and there are a lot of choices and excellent wines at this price point with comparable price/quality out of CA and even OR being much above $20, so we are seeing now and will see more consumers seeking us out and more out-of-state distribution of WA wines because many cannot go back to mediocre wines that are in the $15 and under and especially the $12 and under price points. WA also has variety. I mean we grow every wine varietal (except good Pinot Noir, though that is arguable) as well as the best in the world. They, the consumer, have been spoiled and I think they will seek us out more than what I’m seeing and hearing so far. This will be a boom for growers, us wineries, wine bars (including wine-by-the-glass at our tasting rooms), and the supporting industries for wine tourism. None of us boutiques are getting rich but as long as we don’t out-price ourselves, strive for quality growing practices from our growers, and don’t screw it up at and after crush,… we will survive and thrive.
ReplyDeleteLack of a focused sales and marketing plan led to the demise of the above mentioned wineries, not overpricing their product...that can be said across the board. And consumers will buy up again as their discretionary income increases (as it always does). Does a Mercedes perform $60K more than a Ford? Not these days, but people still buy them because they can, and the same is true with wine. So cheer up, Grumpy man! The glass is only half full!
ReplyDeleteTrey is bang on! Know your market. Have a plan AND be willing to adapt. These are extraordinary times and the threshold for mistakes is very low. Personal sales, creating products that fit, recognizing mistakes early and correcting them all contribute to being successful. Feet on the ground win wars and most of the lost in sales can be mitigated by finding or creating a new market even if that means reduced margins. Sales is 70% of winemaking. Price is only part of sales. I certainly agree that pricing has been corrected and the fallout has some "legs" but it will make better business men out of all of us barrel washers.
ReplyDeleteI submit that the "rule of 100" isn't iron clad. Just because my fruit is expensive doesn't mean I need to double my new oak, increase my bottle weight, use an embossed foil label, 2" cork and three color custom capsule!
ReplyDeleteI view the equation as five cost pools: fruit, winemaking, packaging, marketing and overhead. Nothing says they need to move in lockstep. Incremental funds spent on fruit are funds well spent. (Disclosure: Yeah, I'm a grower). I can put fruit at $3,600/ton (or roughly $5/bottle) into a wine that sells for $25 (not $36) and almost(!) break even ...
Trey is totally spot-on. Some people move down to a Ford when times are tough, but you really can tell the difference between the Ford and the Mercedes. Slapping a blue oval or a 3-point star on the grill isn't what makes the difference. Not a lot of 93 pointers come out of the San Joaquin Valley.
The number of high quality wines in the market at unsustainable prices won't continue. It is a result of temporary inventory adjustment and cash flow binds.
A lot of Washington (and Oregon) wineries offer excellent wines at compelling values. Some don't. But I don't think we'll see a dramatic contraction. I think it is the SJV growers who should be worried about the future.