Wine lovers trade down

Grape proves to be not-quite-recession-proof passion

By Kevin McCallum
THE PRESS DEMOCRAT

Wine may be an affordable luxury, but 2008 taught Sonoma County wineries that their products are not as recession-proof as they hoped.

High gas prices in the summer kept visitors away from tasting rooms.

High-end wine sales slumped as fine dining dropped off a cliff.

And conservative shoppers traded down from top-shelf vintages in search of bargain brands.

"This market is pretty wild," said veteran wine analyst Jon Fredrikson of Woodside-based Gomberg, Fredrikson & Associates.

Even though the signs of a recession have been around for more than a year, it didn't hit home for many wineries until October and November when the sales figures plunged, Fredrikson said.

Distributors and restaurants, in an effort to save money and to brace for a poor holiday season, purchased less wine, blindsiding many wineries.

Total wine sales still are growing, but the growth has clearly shifted to wines under $10, a reversal of the long-term trend of people buying better wine, Fredrikson said.
"People are trading down. Everybody has their guard up," he said.

Wineries and wine retailers responded to the economic challenges in many ways in 2008, searching for strategies to weather the storm and position themselves for recovery. But most agree that 2009 likely will be another tough year.

Belt tightening
Kendall-Jackson winery founder Jess Jackson has responded to the tough climate with layoffs, a hiring freeze and closure of the Lake County winery where he got his start in the business in 1982.

"I think Jess is just being fiscally prudent because he knows the economy is slowing," said Clay Gregory, president of Jackson Family Wines. "We've got to make some adjustments because our industry isn't growing as strongly as it has in the past."

Every division has been required to reduce spending, Gregory said. Some departments cut travel and entertainment, while others have trimmed hours for workers in an effort to preserve jobs, Gregory said.

"We're trying to be creative about it and not use a chainsaw by any means," he said.
Spokeswoman Caroline Shaw declined to provide specific figures, but said the organization had "about a dozen" fewer employees at the end of 2008 than it did the prior year.

Sales of the wine group's higher-end wines have softened more than its high-volume brands such as Kendall-Jackson Vintners Reserve and La Crema, Gregory said.

Jackson has gone on a buying spree in recent years, spending tens of millions of dollars on high-end wineries, including Arrowood in Glen Ellen, Byron in Santa Maria, Murphy-Goode in the Alexander Valley and Chateau Potelle in Napa. Some wines at Jackson's Verite winery fetch over $200 a bottle.

While sales of these wines are sluggish, Jackson is patient, and believes strongly that demographic and cultural trends justify the company's focus on higher-end wines, Gregory said.

"The long-term view is still good," Gregory said. "The Millennials are still going to be drinking wine, and it's the second largest generation in history."

Like Jackson's wine portfolio, the newly formed Ascentia Wine Estates in Healdsburg has both high-end wines and value brands. Chief executive Jim DeBonis said his main strategy is to keep costs down to remain flexible.

"We're going to be very focused and very frugal and we're not going to do things that don't have a significant impact," DeBonis said.

Focusing on value
As consumers slide down the price scale, wineries and retailers have been struggling to adjust.

"I noticed it about a year ago, but about six months ago it started picking up," said Jason Jenkins, owner of Vine and Barrel: Fine, Rare and Boutique Wines in downtown Petaluma.

Jenkins estimates sales of wines over $50 a bottle have declined at least 30 percent. His best selling wine is now an $8 grenache from Spain.

"It's great and it's cheap," he said.

Jenkins doesn't see the shift to value changing soon, and is remodeling his shop to build a wall display devoted only to wines under $10.

Ben Pearson at Bottle Barn in Santa Rosa said there's "big time softness at the high end," with sales off by "double digits, easy." Foot-traffic is up over last year, Pearson said, while the average sales down about five percent, he said.

"We feel like we're reasonably well positioned for these type of conditions," he said.

Wineries are adjusting by focusing on their less expensive labels. Tiny Kokomo Winery in Healdsburg would love to sell more of its $50 pinot noir, but winemaker and owner Erik Miller says he's happy he has two cheaper alternatives -- a cuvee red blend and a zinfandel -- that sell for $20.

"It's tough for a winery of our size to come out with wines at those price points, but now I look at that as a very smart move," Miller said.

High end hanging tough
While some consumers have switched to bargain hunting mode, there are plenty who remain flush enough to continue drinking the finest.

Bottle Barn carries a French burgundy from Domaine de la Romanee Conti that retails for over $10,000 and it continues to sell, Pearson said. People who can afford such luxuries aren't likely to let a little thing like a recession stand in their way, he said.

"The market for that is the super elite, and they're not going to be affected, unless they invested with (Bernard) Madoff," Pearson said.

The bigger change is that wines once considered harder-to-find are being offered in greater volume and to retailers who could not get their hands on them before, Pearson said.

The most coveted ones, such as Opus One, Williams Selyem and Rochiol, are still going to sell quickly. But some newer wines, such as the latest pinot noir, are longer able to command the prices they once did.

"Now we're putting them on the shelves and they're $80 and people are saying 'I think this really nice $40 one will make me happy,' " Pearson said.

Looking to the future
One winery trying adapt to a softening restaurant climate is Flowers on the Sonoma Coast. Its wines retail for $40 to $60. Eighty percent of 22,000 cases of pinot noir and chardonnay is sold in restaurants. The winery views the slow sales as an opportunity to offer wines to retailers the winery has not done business with before, said Tom Hinde, the winery president.

"I think the key to this recession is to use it position yourself for the next four to five years," he said.

Experience has shown that slashing prices to drive sales is not a smart long-term strategy, said Chris Hanna, owner of Hanna winery and a board member of the Sonoma County Vintners.

That's what wineries did in the early 90s. It's tough to recover from such a move because consumers become accustomed to the lower prices, she said.
"Not panicking, to me, is key," Hanna said.

(You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.)