By Kevin McCallum
THE PRESS DEMOCRAT
(Note from Bob: All the stuff in this article is basically applicable to Oregon, too.)
Hedge fund manager Eric Flanagan spent millions to build the finest boutique winery money could buy. He purchased 120 hilltop acres with panoramic views of Bennett Valley, hired the best vineyard and winemaking consultants, and spared no expense in constructing his Flanagan Family Winery.
Complete with caves bored deep into the hillside and the finest French oak fermentation tanks and barrels, the modern, curved-roof facility opened in 2006. But Flanagan, who manages New York-based EMF Financial Products, made a critical mistake - he assumed California's high-end wine market would continue its inexorable march upward.
He found out how wrong he was last fall, just as his $100 wines were trying to gain traction in the market. The economy was in free fall, housing prices were plunging and consumers were pulling back sharply, eating out less and shunning luxury goods.
His timing couldn't have been worse.
"I think the efforts we made in the winery were good," said Mark Mazzoni, assistant winemaker since 2006 and its only full-time employee. "It's everything else that was falling apart around us."
The winery, including 16 acres of cabernet sauvignon and syrah vineyards, is now for sale for $8.5 million. An adjacent property is listed for $1.5 million, recently reduced from $2 million.
The demise of Flanagan Family Winery is just one stark example of a powerful shake-up under way in the U.S. wine industry. Consumers who for decades have been steadily trading up to higher-priced vintages have reversed course, trading down to cheaper wines in search of better values.
Some think the reversal will be short-lived; others say something has fundamentally changed in the wine business.
"There is permanent shift in the consumer's perception of the value of wine," said Robert Nicholson, principle of International Wine Associates in Healdsburg. "We would be naive if we did not realize that was not happening before our very eyes today."
The sudden retreat is leaving behind plenty of casualties.
Inventories at high-end wineries are building. Wine club memberships are being canceled as consumers lose their jobs or cut back expenses. Layoffs have hit major wine companies like Constellation, Fosters and Kendall-Jackson.
Grape growers are watching prices plunge 30 or even 40 percent compared to last year's record prices. Sonoma pinot noir that sold for $2,800 a ton last year might today sell for $1,800, according to brokers.
And an increasing number of wineries and vineyards are going on the block. "There are more wineries that are in the process of selling than at any time in my memory," said Rob McMillan, founder of Silicon Valley Bank's wine division.
The shift is good news for many low-cost producers, such as Central Valley producers E&J Gallo and Bronco Wine Company, both of which are seeing sales soar. But for the North Coast, the heart of the U.S. fine wine industry, it's a far different story.
The majority of the region's wineries are small, family owned operations selling much, if not all, of their wines above $20.
Sales of those wines are off as much as 15 percent this year, said analyst Jon Fredrikson, partner at Woodside-based Gomberg, Fredrikson & Associates.
For those selling wines over $50, the landscape looks even bleaker. Many wines from $50 to $125, of which Sonoma and Napa has plenty, are in a "dead zone," McMillan wrote in his April "State of the Wine Industry" report.