GRAPE SHORTAGES AND FLAT PRICING: WHAT GIVES?
After taking a look at the Silicon Valley Bank’s annual state of the wine industry report, we wanted to share a few of the highlights. SVB’s wine division was founded by Rob McMillan in the 1990’s and has since become a staple in the wine industry through his annual reports based on financial data and a 500 respondent survey. Here we go.
GRAPE SHORTAGES FOR HIGH-END WINES. In 2007-2008, SVB predicts that the premium wine segments will experience shortages across most major varietals in the North Coast and Oregon regions, which in turn will create better pricing for Napa, Sonoma and Oregon. The shortages stem from double-digit growth in consumer demand and a lack of new plantings of vineyards for the last several years. According to the report, the aforementioned varietals include Chardonnay, Zinfandel Cabernet. Oregon remains short on Pinot Noir but has 1,400 nonbearing acres to support future growth. Merlot, as it turns out, is still in a state of oversupply.
“For Napa and Sonoma, we expect to see general grape and bulk price increases for Pinot, and particularly Chardonnay though the year; flat to slight increases for Cabernet, and flat prices for Merlot. By 2008, with no change in trends, we expect a supply shortage of all major varietals, with the exception of Merlot.”
“We would expect generally flat pricing for grapes in the Central Cost of California, with the exception of Chardonnay, and perhaps some additional price increases on already expensive Pinot Noir.”
“Oregon is well-positioned for longer-term growth because of the growing popularity of its primary varietal, Pinot Noir."
So, while things appear good for the premium and high-end wine category, SVB cautions that bottle prices will likely remain flat or close to flat for the year. It seems strange since the report is forecasting shortages, but SVB cited the following reasons: limited discussion of a shortage in the industry, distributor consolidation poses problems, foreign wines and last year’s high end price increase.
“For wineries, now is a good time to think of extending grape contracts with growers, before shortages become too apparent and prices increase. It's also important to start to plan and focus wine allocations and distributors to the right regions to ensure the markets in which you want to build your brand have the right supply allocated."
High-end wineries still face hurdles with a closed distribution system, threat of foreign wines, labor shortages and high land costs. A leveling out of the high end profitability is expected in the next two to three years, according to the report, “unless those prices are passed on to consumers.”
LOW-END STRUGGLES CONTINUE. When it comes to the low-end, high volume segment, SVB “expects a continuing struggle against the tide of lower-priced imports (bulk and bottled) and lower- or negative-growth rates on box wines and wines priced below $3 retail.” Simply put, large wine companies aren’t willing to pay much for grapes in the high-volume segment due to cheap foreign imports, the over-supply in 2005 and a reduced demand for the lowest priced wines.
“Cheaper foreign wine which, in today’s market, is a direct substitute for non-appellation wines. Simply said, the costs of many foreign bulk wines are less than what it costs to produce domestically.”
As a result, SVB recommends that “the industry promotes quality and stimulates demand for broad-based California wines. As of this writing, it does not appear those promotional efforts can be expected to bear results this year.”
GRAPE SHORTAGES FOR HIGH-END WINES. In 2007-2008, SVB predicts that the premium wine segments will experience shortages across most major varietals in the North Coast and Oregon regions, which in turn will create better pricing for Napa, Sonoma and Oregon. The shortages stem from double-digit growth in consumer demand and a lack of new plantings of vineyards for the last several years. According to the report, the aforementioned varietals include Chardonnay, Zinfandel Cabernet. Oregon remains short on Pinot Noir but has 1,400 nonbearing acres to support future growth. Merlot, as it turns out, is still in a state of oversupply.
“For Napa and Sonoma, we expect to see general grape and bulk price increases for Pinot, and particularly Chardonnay though the year; flat to slight increases for Cabernet, and flat prices for Merlot. By 2008, with no change in trends, we expect a supply shortage of all major varietals, with the exception of Merlot.”
“We would expect generally flat pricing for grapes in the Central Cost of California, with the exception of Chardonnay, and perhaps some additional price increases on already expensive Pinot Noir.”
“Oregon is well-positioned for longer-term growth because of the growing popularity of its primary varietal, Pinot Noir."
So, while things appear good for the premium and high-end wine category, SVB cautions that bottle prices will likely remain flat or close to flat for the year. It seems strange since the report is forecasting shortages, but SVB cited the following reasons: limited discussion of a shortage in the industry, distributor consolidation poses problems, foreign wines and last year’s high end price increase.
“For wineries, now is a good time to think of extending grape contracts with growers, before shortages become too apparent and prices increase. It's also important to start to plan and focus wine allocations and distributors to the right regions to ensure the markets in which you want to build your brand have the right supply allocated."
High-end wineries still face hurdles with a closed distribution system, threat of foreign wines, labor shortages and high land costs. A leveling out of the high end profitability is expected in the next two to three years, according to the report, “unless those prices are passed on to consumers.”
LOW-END STRUGGLES CONTINUE. When it comes to the low-end, high volume segment, SVB “expects a continuing struggle against the tide of lower-priced imports (bulk and bottled) and lower- or negative-growth rates on box wines and wines priced below $3 retail.” Simply put, large wine companies aren’t willing to pay much for grapes in the high-volume segment due to cheap foreign imports, the over-supply in 2005 and a reduced demand for the lowest priced wines.
“Cheaper foreign wine which, in today’s market, is a direct substitute for non-appellation wines. Simply said, the costs of many foreign bulk wines are less than what it costs to produce domestically.”
As a result, SVB recommends that “the industry promotes quality and stimulates demand for broad-based California wines. As of this writing, it does not appear those promotional efforts can be expected to bear results this year.”
posted at 12:25 PM
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