NW wine industry: worries and bargains

Colleen Glennon of Lemelson Vineyards hoped to escape the bad economic news on her recent marketing trip to British Columbia. Instead, the national sales manager for the noted Carlton, Oregon pinot noir producer heard “the same violin story” there that she’s been hearing throughout the U.S.

Sales were “incredibly slow” in January, and buyers at every level have been “so cautious," she says. Restaurant and retail customers in premium wines are trading down a price point, less interested in Lemelson’s low yields and organic farming methods than getting a good deal. She’s seeing rival wineries and distributors dropping prices on bottles that retailed for $35, to below $30.

Lemelson’s flagship pinot, Thea’s Selection, retails for about $40 a bottle, while its single-vineyard bottlings range up to $60. "Like everyone else, we’re probably going to have to reconsider pricing," she lamented.

Indeed, most others in the wine business in Washington and Oregon report that it’s tough out there and likely to get tougher — particularly for new wineries, high-end producers without big reputations and scores, and those that depend heavily on the hard-hit restaurant business. Even giant Jackson Family Wines in California, the parent company of Kendall-Jackson, laid off about 20 percent of its staff in January.

Many wineries are trying to shift their distribution mix away from restaurants and toward retail. Most are carefully nurturing their wine club members, hoping the direct-to-consumer business provides an island of stability. Washington and Oregon wineries questioned are predicting that, at best, sales in 2009 will be about the same as last year. “You’ve got to be really skeptical in this environment that you’ll see any sizable growth in 2009,” says Mark Freund, senior relationship manager for Silicon Valley Bank in California, which works with about 250 West Coast wineries. “If you can maintain flat sales, you’re not doing too bad.”

Still, wineries, retailers, and industry experts say wines that are a good value in quality and price are still selling well as more Americans buy wine to consume at home — an affordable luxury in times of recession and belt-tightening.

The big dogs in Washington and Oregon remain confident that their value-priced wines and wide retail and restaurant distribution will carry them comfortably through the hard times. A number of well-established smaller producers also express cautious optimism.

Keith Love, vice president of communications for Ste. Michelle Wine Estates in Woodinville, said his company had “a pretty good January.” He noted that 99 percent of Ste. Michelle’s two-million case production is retail priced at $10-$20 a bottle. “We’re not anticipating any damage to that business.” He predicts a slowdown, however, for Ste. Michelle’s luxury brands — Spring Valley, Col Solare, and Northstar — which retail for $40 a bottle and up and depend heavily on restaurant sales.

King Estate, Oregon’s biggest producer, is predicting a 9 percent sales growth in 2009, based on a strong December and January, says Steve Thomson, executive vice president at the Eugene, Ore.-based winery, which produces 160,000 cases a year.

King wants to reverse its current mix of 55 percent on-premise/45 percent off-premise. “We got caught flat-footed in the trend toward grocery movement, which is really strong now but wasn’t our forte nationally,” Thomson says. “We’re making some corrections. But unlike most Oregon wineries, we have seven people across the country doing the handholding that’s necessary in this economic environment.”

The bad economy will be particularly challenging for the many new, small wineries in Washington and Oregon retailing their bottles for $40 or more. They lack brand recognition and a strong distribution network. “It’s particularly tough for newcomers selling at a high price point,” says Chris Sparkman, of Sparkman Cellars in Woodinville. “If [consumers] don’t know who you are and you don’t have any [wine rating] scores, boy, that could be a tough one. I see a lot of new guys who anxious looks in their eye, wondering how they’re going to get it done.”

Some might have to sell their properties if the recession is a long one. “I think there will be some shakeout,” Freund says. “There will be second-and third-tier brands that won’t have the stomach or capital to gut it out for the next couple years.”

But Freund and others predict that better-established brands will be fine as long as they are smart. A number of established premium producers say their sales are holding steady and they even plan to expand. Ken Wright, of Ken Wright Cellars in Oregon, says he’s got significant bank financing for remodeling and expanding his production space to handle additional fruit he has coming from three sites.

Freund notes that it’s a good time for wineries to build facilities — or even acquire other properties — if they can do it without leveraging themselves, because labor and materials costs are down.