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Extra12/7/2009 4:33 PM ET

Recession's fruit: Big wine bargains

Americans are buying more wine than before, but they're shying away from higher-priced bottles. That's making it tough on the industry but creating deals for consumers.

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By Elizabeth Strott
MSN Money

Wine lovers, listen up.

Consumers and restaurants have cut back on purchases of high-end wines as the recession has weighed on Americans. That has caused an oversupply, which in turn is driving down prices.

Some wineries and grape growers have been suffering an "inventory-induced recession" since distributors and retailers late last year started radically reducing high-end inventories, said Robert Smiley, the director of wine industry programs of the University of California, Davis, Graduate School of Management.

Sales of wines above $25 a bottle, in particular, have taken a big hit: Those wines slumped 12% in the year's first quarter compared with a year earlier, even though total U.S. wine sales rose about 5% in terms of volume, said Jon Fredrikson, an industry consultant with Gomberg, Fredrikson & Associates. Through June, sales of high-end wines were down 11%, according to Silicon Valley Bank's state-of-the-industry report.

And market research group Mintel is forecasting a 2.1% increase in total wine sales this year, to $27.6 billion. Sales fell 3.2% in 2008, when the financial markets collapsed.

Though the glut in high-end wine is tough for wineries, it's a great deal for wine-loving consumers. "For the next two to three years, the consumer can expect deals on higher-priced wines," Smiley said, noting that those wines usually start at about $15 a bottle.

"The $100 bottles of wine are just not selling," said Kevin Zraly, the founder of the Windows on the World Wine School and MSN's Delish wine blog. "Even before this recession, the greatest values in the world were not under $10. They were and are in the $10 to $25 range. That is where you are going to get your best value for your money right now."

A dilemma for growers

Prices of grapes on the spot market have plunged, exacerbating the already tough economy for many grape growers. Chardonnay grapes are going for about $500 a ton, down from $2,500 two years ago, and pinot noir is down about 43% from last year's $3,000.

"The longer we went into the season after the harvest began, prices became weaker," said Nick Frey, the president of California's Sonoma County Winegrape Commission. The plunge in spot prices has forced growers to decide whether to take a low offer -- one that may not cover the cost of the harvest -- or possibly leave their fruit on the vine to rot.

"It's been hard to find a buyer. If you're a small grower and you don't have a buyer, you essentially lose 100% of your production costs," Frey said.

"It's the toughest in my 15 years," Northern California grower Joe Reynoso told the Santa Rosa Press Democrat. Reynoso said he intends to custom crush his grapes, store the product and sell it as bulk sometime in the next two years rather than accept lowball offers or leave the grapes to rot.

"I'm surprised at this point that there haven't been more wineries that have gone out of business," Zraly said. "Some of these wineries are not going to make it."

Trouble for wineries

Difficulties abound across the board.

"As a rule, wineries that rely on distributors are having a hard time. Buyers for the retail stores aren't buying the top-priced wines. Restaurants aren't stocking them," Vic Motto of Global Wine Partners told Decanter.com.

Some wineries will likely have to put themselves up for sale, according to Steve Fredricks of Turrentine Brokerage. "It's going to continue to be challenging for smaller wineries," particularly those that make only a few thousand cases, he said.

Next year will be the tough one for many wineries, when "the little guy is in bigger trouble," said Ian Dorin, the wine director of WineLibrary.com. The vineyards that have strong brand recognition or long waiting lists are expected to weather this storm. The big companies such as Constellation Brands (STZ, news, msgs), whose brands include Robert Mondavi and Ravenswood wines, and Diageo (DEO, news, msgs), which makes Beaulieu Vineyard wines, should also be just fine.

Years before a return to old pricing

"I don't know if it's ever going to go back to what we called normal," Dorin said.

Wine distributors are discounting the price of existing inventories to retailers, offering price cuts as large as 30%, according to a Sonoma County wine report by Moody's Economy.com.

As Americans cut back on high-end dining, restaurant wine sales declined by 5% in 2008, according to market research company Nielsen, in contrast to a 7% increase in retail wine sales.

It could take years before prices make their way back to where they were just a year or two ago. "It'll last until people return to restaurants and return to their old buying habits," UC Davis' Smiley said.

A good deal for wine lovers

However, the wineries' troubles mean a deal for oenophiles. Last year, the 28 brands that sold at least 2 million cases each in the United States grew by a combined 1.1% in sales volume, according to Impact Databank's 2009 report on the U.S. wine market. And those 2 million case wines were priced 35% below the industry average, according to the report.

Consumers are "going to go where they can get a good bottle of wine at the best cost. Anytime that someone can pay less, they will," Dorin said.

But Americans still love their wine.

There's still positive growth and consumption, said Frey, of the Sonoma County growers commission, and "the industry will come back. You may trade down in wines, but you remember how good some of the ones you used to buy were. As people get more money in their pocket or more confident that the money in their pocket won't be needed for an emergency, they'll continue to buy wine. People appreciate fine wine."

The bottom line, Zraly says, is that "it is a great time . . . to buy wine. There's a lot of good wine out there at the right price."

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