by Jeff Miller

Ultimately, wine is subject to the same laws of supply and demand as any other product. With our recent economic troubles, the price of wines has declined, putting pressure on everyone in the distribution chain. The wine business, like most others, has taken its lumps. Consumers are buying as many bottles as before, but they are paying less per bottle. Upper-end producers in particular are suffering. I wouldn’t be at all surprised if even Screaming Eagle is feeling the effect. To compound this, due to the credit crisis, distributors and retailers have had their credit lines slashed. Their response (not unreasonable under the circumstances) is to cut inventories (which results, among other things, in items often being out of stock). So even if the consumer is buying just as much, the wineries aren’t selling as much as they used to since distributors and retailers are slow to restock sold merchandise.

The wine business is more vulnerable than most to a decline in demand, since supply is hard to reduce in the short term. Wine that’s sold today was fermented several years ago, and isn’t disappearing just because demand has slackened. It’s always a problem trying to figure out how much wine to make, because you’re trying to predict how things will be several years down the road. In 2006, few foresaw our present predicament.

This tank gets filled with wine several years before that wine will be sold.

Wineries have only compounded this problem. In an attempt to maintain cash flow, they have cut prices. For the consumer, that may be welcome in difficult times. But for the producers, it’s a no-win situation. If I cut my price to try to sell more wine, but my competitor does the same thing, then all we’re doing is treading water, albeit at lower income levels for both of us. But if I don’t cut my price, while my competitor does, he’s going to increase his sales at my expense. So everyone’s ends up cutting prices even though, in the end, no one benefits by it. Long term, it’s not sustainable, since the wineries can’t continue indefinitely a situation where they’re not making any money, or worse. So this recent decline in prices has to be temporary, though painful for as long as it lasts. The longer it lasts, the more of a shake-out the industry can expect, with the loss of some brands that can’t hold out for better times. Smaller wineries are particularly at risk.

For better or worse (depending on whether you’re buying or selling), the cost figures I’ve cited above are getting squeezed at every stage of the production and distribution network. Everyone’s working harder to sell at tighter and tighter margins. Those who are still buying at the upper end are doing so at bargain prices, at least in relation to where those wines sold not too long ago. As the upper end wines get cheaper, it puts pressure on the medium-priced wines, and so it goes down the line. It would be unfortunate if the effect of our current economic crisis is that the number of smaller producers contracts further, accentuating a trend toward domination of the business by the larger corporate wineries. But that may be exactly where we are headed.

This entry was posted on Monday, June 29th, 2009 at 8:46 am and is filed under Wine Sales and Pricing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.