Source: THE PRESS DEMOCRAT
By CATHY BUSSEWITZ
Sunday, August 26, 2012
After years of enjoying discounts on fine wines, consumers are finding prices have begun to inch back up.
They can partly blame themselves. Feeling slightly more confident about the economy, wine drinkers who traded down from mid-priced varietals during the recession are increasingly willing to pay $20 or more per bottle, according to a new report by Moody's Analytics.
North Coast wineries, in turn, are slowly raising prices. Wine prices increased in July for the first time in 31 months, climbing 0.3 percent compared to a year ago, Moody's reported.
The uptick in prices signals a welcome change for Sonoma County, which relies heavily on wine for its economic vitality, economists said.
"Wine is our calling card," said Ben Stone, executive director of the Sonoma County Economic Development Board. "It's what makes our tourism thrive, and it adds to the aura of the area for recruiting employees and companies ... so it's great that things are looking better."
Mother Nature is also partly to blame for prices in the wine aisle. After two short harvests in Northern California's Wine Country, there are fewer bottles of wine to go around. Growers, in turn, have been raising prices for their grapes. In Sonoma County, grape prices rose 4 percent last year, according to Moody's, adding to the pricing pressure.
"There's no question that discounts have been reduced, as the wine supply has really tightened overall," said Jon Fredrikson, president of Gomberg, Fredrikson & Associates, a wine industry consulting firm based in Woodside.
Wine sales grew 5 percent by volume in the U.S. in 2011, while revenues from those sales grew 6 to 7 percent, Fredrikson said.
A sampling of Sonoma County wineries with case production ranging from 100,000 to 2 million per year showed 2 percent growth in revenue in the past year, but only 0.3 percent growth in case shipments, according to Nielsen data. That indicates price increases are helping to drive revenue growth, said Mike Collicho, client business partner with Nielsen.
"For the domestic table wine category, all price segments above $9 are growing with the strongest growth seen in $20 and above," Collicho said in an email.
Sales of wines priced over $50 grew 11 percent in revenue and volume, he said.
Many wineries were forced to cut prices during the economic downturn. Wine prices dropped about 1 percent annually over the last two years as consumers pulled back, according to data from Moody's.
"During the recession and the recovery, Sonoma County got hurt," said Eduardo Martinez, senior economist for Moody's Analytics. "There was a flight to value. People weren't going to buy the same amount of wine for the same price."
That left wineries, especially those that charge more than $10 a bottle, with excess inventory. And some boutique wineries took to discounting their wines to move products off the shelves.
But that inventory of unsold wine has largely cleared out over the last six months.
At Oliver's Market, which stocks a broad selection of wines from Sonoma County, wine buyer Richard Williams has noticed prices inching up.
"I think the main driving force is having two very tough vintages," Williams said. "They were wonderful years, but they were short crops. And that really meant they had to raise their prices to compensate."
Wholesale prices for Sonoma County wines that he buys have increased 10 to 15 percent, he said. Local red wines, especially pinot noir, have changed the most, while chardonnay and sauvignon blanc have seen more modest increases.
"It's very, very justified," Williams said. "You can't run on fumes. And really I think wineries could not sustain going the way they were in the last couple of years, and not raise prices."
During the recession, flash websites like invino.com and winestilsoldout.com emerged to help wineries move inventory, offering discounts of 35 or 40 percent off suggested retail prices.
"In 2009, when everyone was losing their homes and houses were going under water, affordable luxuries were no longer $40 or $50 bottles of wine," said Tony Westfall, CEO of Good Company Wines, which ownsinvino.com. The website, based in Sonoma, was launched in 2010. "Affordable luxuries became a $10 or $20 bottle of wine."
Even so, Westfall was pleasantly surprised to sell twice as many bottles as he expected of a $99.99 Napa cabernet sauvignon during a recent sale. And he expects wineries to be able to sell more of their stock at the prices they desire, he said.
"I've seen some price increases on some of the cult brands out of Napa, where they had taken the price down during the recession," Westfall said.
Wines sold at Bottle Barn in Santa Rosa also have been increasing in price, said Ben Pearson, wine buyer. A chardonnay that he sold last year for $14.99 a bottle will probably go up $1 in price, while a cabernet sauvignon that fetched $25 last year will probably be bumped up to $27, he said.
"Not everyone's doing it, but I'm definitely seeing it more than I did in the last couple of years," Pearson said. "There's no question that I'm seeing it from the larger brands. And when the larger brands do it, smaller ones follow."
Finding the right price is a precarious balancing act. If a bottle is marked too high, consumers may turn to one of many less expensive brands. And retailers or distributors may balk at higher prices, fearing sluggish sales.
On the other hand, if the price is too low, wineries with smaller inventories could sell out of a varietal and end up losing valuable shelf space in the stores.
Distributors also grow concerned about losing volume if a winery increases prices, Fredrikson said.
"Nobody likes price increases in the trade, but at some point you have to take them, because costs are going up," Fredrikson said.
Balletto Vineyards and Winery, which owns 600 acres in the Russian River Valley and makes 15,000 cases of wine annually, has taken modest price increases in its estate wines, said John Balletto, president.
"Certain varieties like pinot noir are in huge demand, because there's just not a lot of supply," Balletto said. "The bulk supply is very low, and the cased goods inventory is really low. So those varieties are moving at a very fast rate."
The winery has been able to keep prices relatively steady through the recession and changes in the grape market, since it controls its grape supply by sourcing from its own vineyards. But labor costs and inflation are adding to the cost of inputs.
His wines appear on menus in more than 150 restaurants in Sonoma, Napa, Marin and San Francisco, he said. Agreeing to a price for a glass of wine is a balancing act.
"Once you do maintain those markets and those placements, you want to fight hard to keep those," Balletto said. "It is difficult. Sometimes you do lose shelf space, and you lose a spot on a menu if you raise your price above a certain point."
Other local companies like Rodney Strong raised prices on sauvignon blanc after the 2011 crop was pummeled by harsh weather, Williams said.
Imports from countries with favorable exchange rates also could become more attractive to consumers who don't want to pay more. The value of U.S. wine imports surged 14 percent last year, Moody's reported.
"But even if prices may be up, there's still plenty of wine available for everyday consumption," Fredrikson said. "And 'Two Buck Chuck' is still $1.99 at Trader Joe's."
About 80 percent of California wines sell for less than $10 per bottle, he said.
Consumer spending has returned to pre-recession levels, and economists expect consumption to improve in the near term, meaning wineries are less likely to sell high-end wines at steep discounts, according to the Moody's report.
"There were a lot of wineries out there that had wines in the $50 range, and that market has curtailed excessively. But as the economy rebounds, the desire for those wines is kind of rekindling," Williams said. "And if the economy continues to improve as we've seen, then the desire will still be there."
