Buyers who have watched prices for most wines rise in the past several years may see prices drop in the next few months, the result of an expected surplus of wine in California.
That is the view of a number of wine industry analysts who see more wine and less demand in California, a situation caused a number of unrelated factors. But taken cumulatively, they add up to lower prices for many wines.
The evidence arguing for lower prices includes a large 1989 wine grape harvest, especially of premium grapes from California's North Coast, and the coming into production of new vineyards that were planted when demand for premium wine was high two years ago.
In addition, according to an industry source, E&J; Gallo has already lowered prices that it pays for Zinfandel grapes by half. Thousands of cases of 1986 Chardonnay, one of the most popular California wines, remain in warehouses, pointing to flat sales for much of the wine already released to market. Consumers are opting to pay $3 for a bottle of wine that differs little in quality from wine costing twice as much.
The supply of premium grapes is a major factor. After two relatively light years in terms of volume in California's North Coast, tonnage is reported to be up more than 20% in most regions.
Jon Fredrikson, president of Gomberg, Fredrikson & Associates of San Francisco, a wine industry economist, said the minor shakeout that is coming in the wine industry is caused by several factors.
"It's not just the consolidation of the (grocery store) chains," Fredrikson said, "the consolidation of the wholesalers, or even Proposition 65 and the demand for warning labels."
(Proposition 65 is a state law that, among other things, requires businesses that sell alcoholic beverages to post warning signs of the dangerous effect alcohol can have on pregnant women and their fetuses.)
Fredrikson said sales of California wine are off 11% for first six months of 1989 "and that's a worry for the industry. I personally think Prop. 65 and other fears about drugs have a lot to do with it. Every national weekly (magazine) has a story on the drug war, and they drag in alcoholism and speak about wine as if it's the same as beer and spirits.
"And this is happening at the high end of wine as well. People who typically consume fine wines are cutting back by a certain percentage, and even if it's only one glass during the evening meal, that means less wine is needed."
Thus, there will be less demand for the potentially huge crop being harvested. Most observers say prices this year will not be higher than last year, stopping a four-year upward spiral. Prices for Chardonnay, Cabernet Sauvignon and Zinfandel grapes have risen rapidly in that span, prompting over-planting of those varieties in many areas.
Although prices for Cabernet and Chardonnay in prestige locations such as Napa and Sonoma counties may not drop immediately, this week Gallo dropped its price significantly for Zinfandel.
An industry source said Gallo told growers it would pay $350 a ton for Zinfandel grapes used to make White Zinfandel and $450 a ton for Zinfandel grapes to make red wine. Prices were about double that a year ago.
"The White Zinfandel market has cracked wide open," Fredrikson said. "The price cycle has peaked."
Switch to Low-Priced Wines
Ed Everett, president of New World Wines, a San Francisco marketing company, said: "Look around: You'll still see 1987 White Zins on the shelves. That tells you something."
Fredrikson said the collapse of the White Zinfandel market was caused in part when consumers realized that the quality of most White Zinfandel selling for $6 a bottle and other "blush" wines selling for $3 was about the same. He said the overall "blush and pink" market in California is about 30 million cases of wine, about 28% of the premium wine market.
Fredrikson noted that Gallo's White Grenache and similar products from Paul Masson-Taylor California Cellars and Franzia, at prices 33% less, created a situation in which consumers of White Zinfandel simply switched to the lower-priced wines.
Chardonnay prices, which have risen steadily since 1984 (when the state last faced a huge glut of wine), rose again in the past year. Scorecard, a Southern California-based monthly publication that charts the local premium wine market, noted in its July issue that major brands' average shelf prices rose 5% in the past six months. However, Scorecard also noted that discounts and promotions are invading the market at the same time.
Price increases may reflect the higher cost of grapes in some North Coast counties in 1987 and 1988 (in part because of shortages brought on by high demand and small harvests). But the price increases may haunt wineries in the coming months, said Everett.
"What we're seeing is that the market is segmenting itself into several distinct categories and the boys with the gilt-edged reputations can't take orders fast enough," said Everett. "The top premium producers have to release (their wines) faster than ever they wanted to.
"But just below them are 350 or 400 guys who are up to their eyeballs in '86 Chardonnay," he said. "I know personally of 25,000 cases of Chardonnay that haven't moved, and I'd be willing to bet that a couple of hundred thousand cases of Chardonnay are sitting in warehouses in that exact same situation."
Everett said Cabernet Sauvignon is in a similar boat. "The premium Cabernets sell on demand at virtually any price, but there's plenty of Cabernet around and prices can't remain high for long."
Everett said one major result of this shakeout, which he sees as happening within six to nine months, is that wineries will be forced to price their wines by the quality and the quantity of the vintage. In the past, prices set one year usually carried into the next year, or went higher.
Must Tell the Truth
"Pricing by vintage is being forced on us," he said. "It's finally dawning on people that the market is beginning to tell them: If the '86 Chardonnays are on the thin side and you follow that with the dynamite '87s, you have to price the '86s accordingly.
"You can't pull the wool over their eyes any more; you can't say every year is a vintage year. You have to tell the truth."
Grape prices along the state's North Coast (Napa, Sonoma, Mendocino and Lake counties) appear to have stabilized, according to Bruce Rector, a vice president and the wine maker for Glen Ellen Winery in Sonoma County.
Rector said prices for premium grapes on the North Coast should remain at levels similar to 1988 because of the typical one-year lag that occurs in the region. And although prices may decline in 1990, he foresees no drastic drop in prices.
A wine glut, such as existed in California in 1983 and 1984, won't return immediately, Fredrikson said. "It'll take a couple of bumper crops in a row, and this one is large, and it'll certainly stabilize prices.
Although estimates are that the North Coast wine grape harvest may be 20% to 25% higher than 1988, the state Department of Food and Agriculture estimates that the overall statewide crop will decline 6% to 1.9 million tons. Industry analysts say the big declines will come from the San Joaquin Valley, notably in the Bakersfield area, both in terms of yield and price, and in Madera and other Central Valley counties.