FYI | May 15 2009
By Chris Shaw
Just as with equity markets and most other asset classes, wine values tumbled in the fourth quarter of 2008 and in the view of Silicon Valley Bank wine division founder Rob McMillan any recovery is, again like for many other asset classes, going to be a slow, drawn out process.
Overall McMillan expects modest growth in the higher volume segments of the market, while the fine wine sector is likely to end 2009 in pretty much the same position as it started the year. There is an element of good news/bad news to the sector in McMillan’s view, the former including wine supply running in balance to slightly short and consumption in the US market continuing to trend higher, while the latter includes factors such as depressed restaurant sales and lower consumer spending generally.
While the supply side is relatively balanced, McMillan sees little scope for price rises given the state of the demand side of the market, with unemployment rising and less people eating out, let alone spending on expensive fine wines to put in their cellars.
As a result, industry participants expect 2009 to be a difficult year, SVB’s annual wine conditions survey showing it is the large scale producers that are most optimistic, but even this optimism is tempered somewhat given sales growth in the industry has fallen from 23% to zero in the space of two years on McMillan’s numbers.
This decline has caused a number of problems given the existence of long-term contracts, which require growers to commit to production and inventory positions before the actual level of demand is known. The likelihood as a result is declining gross and net profit margins through the industry over the next two years.
Among the US producers the most optimistic according to the group’s survey are those in the Central Valley, while those in the Napa and Sonoma are the most pesssimistic. Tellingly, those who have been in the industry the longest are the most cautious at present.
The good news for growers is the supply of grapes is as well balanced as it has been for many years given lower inventories, lifting contract pricing to the point where most growers can make at least a modest profit. An offsetting factor however is the growth in imports, as foreign bulk wine into the US rose by 27% in 2008.
This has speeded up the move by distributors to drop hundreds of smaller brands from their portfolios, a trend McMillan expects will continue in coming years as bigger producers increasingly align themselves with national distributors. This is causing some wineries to change hands at prices that would have been considered a bargain a year ago and again McMillan sees this trend continuing for some time.
In terms of market price points, there is still an ok market for red wines below US$35 per bottle and a little less for white wines, US$35-$50 is a grey zone and US$50-$125 is a dead market section. Premium wines above US$125 per bottle continue to sell well.
At the high end supply and demand is pretty well balanced for the 2009 crop year, with some scope for it to run short in Cabernet and Merlot becoming better balanced than was the case last year. Pinot Noir is also a little short, but more balanced than in the past few years.
The future? McMillan suggests even once the US economy bottoms out a return to the growth rates of recent years are unlikely, meaning any recovery will be a slow one. The good news in his view is people still aspire to living well and at some point in time this will equate to spending just a little more on wine than they do at present.
