Monday, May 19, 2008

Trading down on wine

'Recession-proof' high-end labels, eateries feel squeeze as consumers cut costs

The wine industry likes to think of itself as recession-proof.
Wine, the story goes, is more than just a drink. It's a lifestyle, and not one that people are inclined to give up just because times are tight.

But that theory is being put to the test as waves of woe continue to wash over virtually every segment of the nation's economy.

Not only are the majority of economists convinced the nation is now in a recession, more and more seem to think it's going to be longer and deeper than previously predicted.

There are signs that California's $19 billion wine industry is already feeling the squeeze. Luxury wine sales appear particularly vulnerable as consumers facing soaring gas and food prices are eating out less and finding lower-priced wine options on supermarket shelves.

"A recession is upon us and sales growth rates will likely moderate," concludes a recent report on the industry by Silicon Valley Bank. "We believe the margin squeeze many wineries feel today may not be a short-term trend."

The report, based on a survey of more than 500 wineries, remains largely positive about the prospects for the industry's future. It predicts the wine industry as a whole will grow 4 percent to 6 percent annually.

But one worrying sign is that demand for higher-end wines -- long the fastest-growing segment of the industry -- has slowed sharply in recent months.

Sales of wines priced from $15 to $20 a bottle had been growing at about 15 percent a year, with wines above $20 growing at more than 20 percent, according to the study.

But those growth rates dropped last year to 6 percent and 12 percent respectively, the study found, citing data from Trade Pulse.

Nielsen, which tracks wine sales in supermarkets, found similar softness for high-end wines in the first quarter.

The growth rate of wines above $15 has been cut in half, according to Nielsen. On a volume basis, sales that had been growing at more than 14 percent slowed to just 7 percent for the first three months of 2008.

Slowing restaurant sales are a key reason high-end wine sales are slowing, said Jon

Fredrikson, a veteran wine industry analyst at Gomberg,

Fredrikson & Associates.

"The high rollers are not spending as much in restaurants, and certainly bankers are not out there celebrating these days," Fredrikson said.

Changing habits

The softness could be particularly painful for the North Coast wine industry, whose high-end wineries have long enjoyed prominent placement on the wine lists of the nation's best restaurants.

The National Restaurant Association has been warning for months that its members are very worried. The group's performance index dropped sharply in March, to its lowest level in five years.

"The soft economy continues to weigh on the minds of restaurant operators," said Hudson Riehle, senior vice president of research for the association.

At Syrah Bistro in Santa Rosa, chef Josh Silvers said beverage sales -- the majority of which are wine -- are down 4 percent so far this year.

Instead of dropping $30, $40, $50 or more on a bottle of wine for the table, more diners are ordering wines by the glass, which run from $7 to $15 a pour.

That's partly because of a shift in their dining habits.

Syrah, where a seven-course tasting menu with wine runs $128 a person for dinner, is finding more people coming for the less expensive lunch menu.

"People are spending a little bit less, but they still want to go out and treat themselves," Silvers said.

Wine sales at dinner are down about 6 percent, but lunch sales are up 14 percent over last year, he said.

For wineries like Sonoma's Hanzell Vineyards, which sells nearly half of its 5,000 cases to fine restaurants, the pullback is palpable.

Sticking to what's familiar

Restaurants across the country are buying about a third less wine than they have in the past, said Jean Arnold-Sessions, Hanzell's president.

That doesn't mean she's sitting on a bunch of wine she can't sell, it just means she has to work harder than ever to sell it. Arnold-Sessions must travel more to court new restaurants to make up for the drop in sales from her longtime accounts.

It's costly and tiring, but so far she's succeeding.

"The market is still there; the restaurants are still there. It's just harder work now," she said.

One force working in favor of established wineries is that many diners tend to stick with what they know when they aren't feeling flush, said John Hudson, brand director for Sonoma-Cutrer in Windsor.

With more than 80 percent of its nearly 300,000 cases sold in restaurants, the chardonnay specialist keeps a close eye on the "on-premise" market, as it is known in the industry.

"I think when times get tight, people go with what they know," Hudson said.

And even if they don't, deciding instead to try something cheaper, Hudson thinks Sonoma-Curter will win some of that business. As people slide down from the lofty heights of wines over $100 and look for value, he thinks they'll settle in comfortably to Sonoma-Cutrer's $40 to $50 restaurant range.

Retailers feel pinch

Exactly how far consumers will slide in search of less-expensive wines is a hot topic in Wine Country these days.

One of the core ideas supporting the argument of wine as recession-proof is the notion that once people get hooked on high-quality wines, they have a tough time swallowing lesser vintages.

But in today's fiercely competitive market, every winery has rivals nipping at its heels, arguing that their wines cost less but deliver just as much.

"You'll see people who on a regular basis have been drinking Kendall-Jackson at $13 and all of a sudden Blackstone is fine at $10," said Dale Stratton, vice president of strategic insights for Constellation Wines U.S., which owns Blackstone, the popular merlot brand. "Loyalty is very low in our category."

Retailers say they're seeing the trend of "trading down" very clearly.

"With the uncertainly of the economy and the future of our country, those I have talked to are watching their pennies and saving for a rainy day," said Renay Santero, wine buyer for Oliver's Markets, the chain of local groceries.

Oliver's wine sales are up overall, but growth has recently slowed and people are trading down, Santero said.

"The recent tone of the industry is that higher-end wines are sitting on our shelves a little longer than normal," she said.

Despite the pain that may cause some wineries, the wine industry is growing and will likely continue to do so, Fred-rikson said.

The weak dollar tends to make U.S. wines more affordable, in comparison to foreign wines, which bodes well for domestic wineries, he said.

In March, imports "walked off the cliff," plunging 19 percent over the same period in 2007. For the quarter, total imports were off 7 percent, he said.

And unlike the previous recession in 2001, there is currently not a glut of grapes on the market. In fact, several years of strong demand combined with limited planting of new vineyards means wine prices are far less likely to drop, Fredrikson said.

"Sales have softened a little, but it's not like we've fallen out of bed," Fredrikson said. "There is no major crisis here."