May OPNC Newsletter

The Oregon wine industry is facing the most substantial financial crisis it has seen - perhaps ever. Sales are down, inventories are up, and change is on the horizon for many producers - if they survive.

THEN

Oregon wine, and pinot noir particularly, has enjoyed a very strong run over the past decade, particularly since 2001. Prices have risen sky-high, top wines have been allocated, and demand has often exceeded supply. Growth has been impressive - reports of 20 - 30% sales increases year over year have not been uncommon.

At the same time, convinced that strong growth would last nearly forever, optimists planted an average of about a thousand acres per year of new grapevines, ensuring an ever-larger grape supply.

The concurrent explosion of new wineries has been impressive - about two hundred in just about five years, literally. Many of these new producers were able to throw a mediocre-quality wine on the market for $40 or more retail, and then watch it fly off the shelves.

That has changed.

NOW

Starting late last year, the tide began to turn. The first clue was when top wineries told me that tasting room sales over the important Thanksgiving weekend were down about 20%. As the holidays swept by, the crucial Christmas sales season was down significantly across the board.

Since the dawn of 2009, the news has continued to get worse. Sales overall are down 20-30% over last year (which was a no-growth year in any case for many).

Now, Oregon is not unique in this. We know that fine wine sales - code for expensive stuff - are off by about the same percentage nationwide. We also know from wine scanned at large retailers (grocery stores) that sales of wines of $15 per bottle and less are actually UP - by almost 5% at last report.

THE FALLOUT

Producers and other industry players are not sitting around waiting for anational recovery -- they cannot afford that. Price breaks, layoffs and product line adjustments are becoming common.

Indeed, prices are coming down on a wide scale. What terrorist attacks, wine journalist umbrage and common decency could not accomplish, recessionary pressures have. Price drops of 10% or more for excellent wines is now common in an effort to spur sales. On the day I wrote this, Archery Summit's Premier Cuvee dropped 22.3%, for example. Indeed, I've been offered 40% - 50% off the price of good quality wines. This also mirrors the national wine industry - I get about 20 wine emails per day from large retailers, and virtually every top wine is now deeply discounted. 2008 Bordeaux futures for the biggest names are out - at half price compared to recent years. It's a great time to be a wine collector, if you still have money. It begs the question - how much were these guys making before?

On the personnel front, many industry employers are laying off workers. Even knowledgeable industry professionals with long experience are being cast off as a cost cutting measure. And, wine businesses are closing - only a few so far, but I predict more to come. One of my favorite small producers, Matello, is essentially out of business. The owner / winemaker took a day job. There are others.

Another potential source of trouble: Debt burdens. There are a series of shiny new, gravity-flow, LEED-certified wineries out there, loaded with debt. Will the wineries be able to pay for new 'houses'? Penner-Ash has a great new hilltop facility built and owned by a restaurant developer. Restaurant sales are down. The winery building and estate vineyard are now up for sale, with the stipulation that the winery retain a long-term lease. But are there any buyers?

The single biggest response by wine producers to lagging sales? Marketing trips. Everyone is on the road, glad-handing retailers and restaurants, both in Oregon (the industry's largest market) and in other states. It's gotten so bad that I literally hide in my office from winemakers and reps who drop by with bottles to sample. I beg you, folks, call first so I can turn you down on the phone, the easy way.

What's more, many wineries are planning for business to stay bad through 2009 and into next year by realigning their product mix. Soon to be bottled are the excellent 2008 pinots. In the past, such a high-quality vintage would be monetized by pushing more juice into prestige cuvees and high-priced single-vineyard wines. But when the '08 vintage is bottled, a significant percentage of the top juice will be going in to value-priced blends. Better to sell the juice at a lower level of profit than to sit on it, goes the thinking. (The silver lining: consumers will be able to find some of the best deals in years when Oregon's '08s are released.)

THE PAUL HARVEY PART

Also worth noting is that, while widespread, the malaise is not severe enough to affect everyone - yet. Some Oregon producers have made so much money in the past decade, they simply won't lower their prices. It's better to maintain their place in the pricing hierarchy, according to this theory, than to cut prices; indeed, it may take producers years to recover their price points after these recession-driven reductions. Others came to Oregon with money. Perhaps they have slumped from grotesquely rich to merely obnoxiously rich, but rich they remain.

At least one prognosticator opined last year - a couple of times - that the industry was headed for an oversupply situation, and prices must therefore drop. Bill Hatcher stirred a good debate with his essays on the subject. Did he have a functioning crystal ball? Alas, no. His reasoning had nothing to do with the collapse of American financial markets and the resulting global recession.

Allow me a prediction now. There will be a contraction in Oregon wine, primarily among those who flog poor wine for too much money, those who have no financial backing, and those who are excessively leveraged in the face of declining revenues. If you're desire to buy a vineyard or winery, the time is nigh. As the typically-slow summer sales season approaches, those who are holding out against price drops will drop their prices. And in a climate where everyone is pulling back, those wine businesses with a reputation for value, fairness, and that inspire loyalty among their clients, will best weather the storm.