NW wine industry: worries and bargains

Economic squeeze challenges vineyards and rewards consumers

By Harris Meyer

February 26, 2009.

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.

“We’ve been around for a while, and the folks on our mailing list that have followed us have been extremely loyal,” says Wright, whose pinot noirs retail for around $45. “There are tons of new labels, and I’d be concerned if I were in that situation.”

One concerned new producer is Sparkman, who is in the middle of his third release. His wines retail for $28 to $56. He frets about not having widespread distribution. “A lot of distributors in large markets are kind of tripped out there is so much high-end wine,” Sparkman says. “While high-end wine is moving, it’s slowed down considerably. I’m having to hit the ground real hard to gain distribution.”

Sparkman is shifting his production focus because of the bad economy. He recently launched a second label, Wilderness, which retails for $28. He plans to boost production of that lower-priced cabernet/syrah blend, saying the goal is to survive this year. And survival, he says, “may not mean coming out of it with much of a bottom line.”

This bad news for producers is good news for buyers. Sparkman, who also buys wine as the general manager of the Waterfront Seafood Grill in Seattle, is seeing high-end wineries such as Dunham Cellars in Walla Walla offering big discounts. In Washington, such price reductions must be done indirectly because of state distribution laws. Many wineries, Sparkman says, need immediate cash to cover current operating costs.

Sparkman just reworked his restaurant’s wine list to take advantage of the “glut of discounted wine.” He said customers will find cult wines like Quilceda Creek, Sloan, and Abreu on the list. Paul Golitzin, the winemaker at Quilceda Creek Vintners in Snohomish, declined to be interviewed. But he said via e-mail that “we are still going strong and I see no reason to change anything, as of this moment, due to [the] economic downtown.”

Another newer, high-end winery that’s holding its own but watching the market nervously is Seattle-based Long Shadows Vintners, whose wines retail for about $55 on average. Allen Shoup, who heads Long Shadows, expresses satisfaction and surprise that sales were up in December and January from a year ago. “I can’t explain it other than people are still discovering us, and we might be at the low end of the high-priced wines that get the [high] scores we get,” he says. “So far our orders are holding up. I just don’t believe that will continue, though I’m hoping it will.”

But Shoup is worried about small wineries that buy grapes from Long Shadows running into financial problems and not being able to pay. He’s also anxious about his boutique distributors and retailers going under and not paying for the inventory they hold. But none of that has happened yet.

David O’Reilly, co-owner and winemaker at Owen Roe Winery in St. Paul, Ore., says he’s “pretty bullish” this year. It helps that his winery covers a wide range of price points, retailing for $10 to $72 a bottle. He’s predicting a 30 percent sales increase in 2009 based on a 30 percent increase in production, to 70,000 cases.

One of his winery’s strengths is that fine wine stores are looking for value wines of high quality that the supermarkets don’t carry, and his O’Reilly brand, priced in the $10-$20 range, fits this niche. “Quality always sells,” he says. Owen Roe currently is building a new facility in the Yakima Valley and is buying vineyard land in Washington. While O’Reilly has a significant line of credit with his bank, he notices that the bad economy has greatly increased the bank’s scrutiny. “They’re very attentive to every aspect of our business, making sure we have the ability to service our debt,” he says.

O’Reilly is taking advantage of a pullback by some wineries which has enabled him to get better grape deals from some Washington growers. Using those grapes, he’s releasing a value line of Washington wines, including a chardonnay for $10 and a Syrah at $13. “I’ve had numerous vineyards come to me at harvest and say, ‘Take my grapes and pay me what you think is right.’ ”

Rudy Marchesi, owner and winemaker at Montinore Estate, in Forest Grove, Ore., also is bullish. As a value producer of pinot noir retailing for $18-$30 and of pinot gris retailing for $13-$15, Marchesi says 2008 sales were solid and 2009 has started “real strong.” His wines are sold more in stores than in restaurants. He’s doing so well, he says, that Silicon Valley Bank recently called and asked if he wanted an increase in his credit line. He hopes he’s not whistling past the graveyard. “If the economic crisis deepens, people will drink the cheapest thing they can find,” he says. “But people who like Oregon wine are looking to us because we offer good value. I’m hoping that keeps up.”

View this story online at: http://crosscut.com/2009/02/26/food/18869/NW-wine-industry-worries-bargains/

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Printed on May 24, 2012