Wine Surplus Leads to Price Reductions

California wine prices will take a tumble in the next six months because of a huge surplus of wine that is building in warehouses and wineries, say industry analysts.

“There are hundreds of thousands of cases of premium wine sitting in warehouses all over the state,” said Ed Everett, president of New World Wines, a San Francisco wine marketing company. “There’s hardly enough space for this year’s harvest in the existing warehouse space.”

“I think we will see a reduction in front-line prices in the next few months, maybe not in the solid, established brands, but for the average brands,” said Jon Fredrickson, president of the San Francisco wine consulting firm Gomberg, Fredrickson & Associates.

Fredrickson said the current situation was “just staggering, especially if we have anything like a normal crop this year.” Estimates are that California’s crop will be slightly lower than last year’s bumper harvest.

Don Schliff, president of Los Angeles-based Wine Warehouse, said softness in the restaurant business as well as concerns over drunk driving have caused a decline in wine consumption (from 2.24 gallons per person per year to 2.11 in the last year), prompting more and more discounting to move wines that are not selling.

Fredrickson said he recently heard of a 250,000-gallon lot of bulk Chardonnay selling for $4.50 a gallon, about one-third the price for such wine 18 months ago.

An industry insider who asked for anonymity said one top-quality Sonoma County Chardonnay was being offered by a major wholesaler at a 50% discount “because it just wasn’t moving. It’s great wine.”

But some of the discounted wine will never be seen at lower prices on retail shelves.

“Some of the special deals are being offered to restaurants, and they almost never pass on the discount to their customers,” said the insider.

“There is a huge supply of good wine out there and unbelievable deals being made,” said Fredrickson. “Wine is backing up in the pipeline.”

He said established wineries like Kendall-Jackson, Clos du Bois, Cuvaison and other strong brands--”those that have carved out enough of a franchise”--are still selling well and don’t appear to be having problems.

“But we’ve had a period of escalation in prices that was unprecedented.”

The industry source said price increases were brought about “by the Napa Valley Disease--increasing your price based on what your neighbor does.”

Edmund Masciana, wine buyer for Bristol Farms, said the deep discounts he has seen in the past few months for some top-quality wine are hard to pass up. He said one well-regarded Cabernet that’s supposed to sell for $20 can be sold at $15 and the retailer will still make a good margin. Robert Mondavi Chardonnay, with a suggested retail price of $16.50, has been seen at some stores at $9.99.

Wineries have yet to panic, and he doesn’t envision prices dropping radically. “Before they come down, I think they’ll put more money into promoting,” he said.

Everett said the situation is worse than it appears. “There are a number of people who have two, three, even four vintages of Chardonnay bottled and labeled that haven’t moved yet.”

He spoke of the Chardonnay offered at a 50% discount and said, “And I hear hundreds of stories like this.”

He said price drops will be considered immediately after the Christmas holiday season.

“January is a cut-off,” said Everett. “Early next year will be a point of judgment for a lot of people in this business. By then, all the depletion reports will be in about what sold during the holiday season, and the lenders will be looking very hard at these numbers.”

In the long run, he said, supply and demand will bring wine prices back into balance, “but this product is perishable, and it doesn’t take long for a guy to run out of time. Either he gives up his inventory at a loss or he bites the bullet by going to Trader Joe’s or some other retailer where the stuff will go away quickly.”

Gary Brayton, a management consulting principal with the San Francisco office of Deloitte and Touche, an accounting and consulting firm, confirmed that industry production growth has been far greater than demand in recent months and that prices may soon take a dive.

In its annual survey of the California wine industry, which the firm has done for three years, “We found that sales growth had significantly slowed in the premium white and super-premium white wine categories,” Brayton said.

“In 1988 there was a 21% growth in premium white wine sales over 1987, but the growth between ’88 and ’89 was only 4%,” he said. “And in the super-premium category, the growth between ’87 and ’88 was 14%, but between ’88 and ’89 only 8%.

“So what we found was a flattening out of double-digit category increases, but we also saw that production growth was up 40% for premium white and the super-premium white category was up 27%.”

Brayton said there usually is a lag between demand and the industry’s ability to catch up with it, but now, “new plantings of grapes are coming into production at a time when demand is slowing down. We think this is a possible over-reaction to category growth trends, and we also feel that white wines are likely to be very competitive due to supply outstripping demand.”

Red wine sales did not follow the 1987-1989 patterns of white wines, said Brayton.

Deloitte and Touche published its findings in its annual survey of 108 California wineries. The report shows that overall sales of premium wines, both white and red, rose just 7% in 1989 following a 16% increase in 1988.

Wine of the Week

1989 Llano Estacado Chenin Blanc ($6.50)-- Texas isn’t known, yet, for high-quality wines, even though folks such as Bobby Cox at Pheasant Ridge and Ed and Susan Auler at Fall Creek have made waves in their own state. Another Lone Star winner in the last few years has been Llano Estacado, and this wine is a stunning example of why. Fresh as any Chenin Blanc you’ll find and nearly dry, it has the crisp finish of the Loire and the racy, spicy character you find in the best California Chenin Blancs. It has won many awards this year in head-to-head competition with California wines and is now available nationally.