Friday, February 18, 2011

The Rule of 100 or Can the Wine Industry Survive - Anywhere?

Without giving reference to this blog, I got a national rebuttal straightening me out on some facts they thought I had missed - or did I?

My chastisement was for comparing Washington grape/wine prices to California's San Joaquin Valley grape/wine prices. I suppose I shouldn't compare Washington grape/wine prices with Chile, Argentina, New Zealand, Australia, Spain, France, Italy, or South Africa, either. The bottom line is Washington wine is sold in a global market (although few wineries export) and our 700 wineries must compete with everyone - not just the boys and girls from Napa and Sonoma. The last I heard was that a paltry one in five bottles sold in the state was produced in the state.

They think Washington should be compared with Napa and Sonoma, to which Washington compares quite favorably. Not only does Washington produce a similar quantity of grapes, it produces a similar quality of grapes at more favorable prices. I can't argue with that reasoning. We should be kicking butt; but we are not. Most Washington wineries do not have California distribution where they would compete on the home turf with Napa and Sonoma. Add that to the fact that Washington wine prices do not reflect the lower grape costs.

The assumption is that things are just hunky dory in Napa and Sonoma - which they are not. Some of the most spectacular failures have occurred there. How about a $34 million investment going on the block for $11 million. Old brands have disappeared. Grapes that were begged for now go begging. There is trouble in paradise. I just don't blog about it because I am not privy to gutter talk from there.

Let's look at the price comparison. Napa, predominantly Cab I assume, sold for an average of $3,067.62 per ton. The average price for Cab in Washington was $1,297. Since Ste. Mickey's buys most of the grapes in the state, this is probably close to what they paid. At this price they are a very successful company. They also buy packaging in quantity, have a great image, and are sold nationally. Small wineries usually pay WAWGG which was $1500 or oft times a lot more for a famous vineyard. They buy clunky European bottles at exorbitant prices because the Wine Enthusiast likes heavy glass (well, they used to.) They put $.90 corks in these bottles and are self distributed. Washington cannot support 699 wineries with this marketing plan. I don't think California can support 3000 wineries either but someone else needs to weigh in on that.

Is the Washington industry a house of cards ready to collapse? Well, not all the way, but at least a few hundred. The bottom line is that unless some basic facts change, the number of Washington wineries will dramatically decrease. I've covered these points before, but will summarize them again.

1. You might sell 200 cases to your friends at $480 per case, but unless you have a lot of rich friends don't plan to expand to 2000 cases at that price point. Winery owners must keep their prices competitive or stay very small. Under $15 seems to be selling well and under $10 even better. This is the new reality. Retailers and restaurants are refusing to talk to 699 wineries individually. Getting a distributor, which means going three-tier, is becoming a necessity. Getting a distributor big enough to get in the door and one small enough that you don't get lost in the book is becoming impossible.

2. Grapes are already a low value crop as pointed out by growers. But, growers need to be aware that wineries can't command stratospheric prices for their wines anymore. Growers need to know that wineries have slim margins, too. I don't see average grape prices falling dramatically (they can't), but I do see marginal vineyards taken out and wineries demanding pricing that is closer to state average.

3. Most restaurant wine lists in Washington are still predominantly California. Until the Wine Commission can change that, our markets are very limited in the state where most of the 699 wineries sell. It's not that Washington wineries aren't trying to compete. I know of one winery that is chugging out off-branded stuff to Trader Joe's and selling a ton. Another winery has a $6 red on the shelf in Seattle. The Washington wine industry just lacks clout in the form of marketing and distribution to compete with California and the world.

Maybe these new wineries are more aware of reality than I think. Keep it small, keep it tight and keep costs under control. You will never be a rock star, rich or famous, and neither Robert Parker nor the Eric and Andy Show will make or break you. But, you can make a decent living in the wine business with a good marketing plan.

Probably what bothered this blogger the most was that I indicated the demise of wine publications as being part of the demise of the old wine industry paradigm as a whole. Can the market really support all those Advocates, Enthusiasts, Presses, and Spectators? Now that hits home.

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