SANTA ROSA — Early indications of improved fourth-quarter sales of fine wine could partly offset significant declines in sales growth this year, and 2010 could bring some upswing for the segment as trade buyers place orders to maintain new, lower inventory levels, according to a report released today from Silicon Valley Bank’s Wine Division.
However, the trend for a minority of fine wine vintners toward more “bargain transitions,” or sales of distressed wineries, will continue next year “as the realization sets in with financially weaker wineries that a rapid and full recovery in high-priced wine sales is not in the cards at this time,” wrote Rob McMillan, author of the report and founder of the bank’s St. Helena-based wine division.
In a report early this year, Mr. McMillan noted that only the most established brands selling for $50 to $125 a bottle managed to stay outside of a “dead space” of limited sales and distribution activity.
Sales of fine wines, or those selling for more than $20 a bottle, in 2009 could dip 2 percent to 8 percent from the year before, following a dramatic slowdown in sales growth for the segment, according to the report. Overall, 2009 U.S. wine sales, propelled by sales of wines under $10 a bottle, are expected to have a few percentage points of positive growth.
Year-over-year sales growth slowed from 22.3 percent at the end of 2007 to 11.6 percent in the third quarter of 2008 just before the financial-market crash to 2 percent at the end of 2008. Fine-wine sales in the second quarter of this year were 11.2 percent below those of a year prior.
Mr. McMillan called this a correction phase of a normal inventory cycle.
“The de-stocking phase of this correction is largely complete, so producer level sales will improve slightly, even if there is no real change in consumer demand in 2010,” Mr. McMillan wrote. “That said, conditions in the business will be muted by the jobless recovery.”
These corrections hit producers the hardest, but the limited proportion of vineyard acreage in premium wine regions outside of Oregon nearing mature production bodes well for a short correction period, according to Mr. McMillan. Conversely, Australia is facing a significant oversupply of grapes.
Yet fine wine producers should be restructuring to accommodate significant shifts in 60 percent of the market for luxury goods in the past 14 months, and the most successful premium producers already have done so, he wrote.
“Absolute affluent” consumers make up 40 percent of the market for high-end goods and continue to spend as they did before, evidenced by the stock performance of the retailers that serve that demographic exclusively, according to the report. But the “aspiring affluent” consumer has reduced spending on such items as their personal wealth from real estate and investments plummeted. And the baby boomer generation, which has been a significant market for high-end wines, largely has suffered, particularly those close to retirement age.
“For many Boomers, a $50 bottle of wine is now permanently outside of their budgets and the fine wine industry will need to give more attention in marketing to the under 40 consumer,” Mr. McMillan wrote.
He speculated that the rising wine affinity among those drinking-age consumers, especially the younger so-called Millennial generation, could become a dominant factor in luxury wine sales.
This isn’t a “permanent” change in fine-wine sales, as consumers have been showing a trend toward increasing per-capita spending for decades, but the crash in housing values, consumer wealth and credit, business spending and restaurant sales will take time to recover, according to the report.
“We do believe that we are in the midst of a price reset in fine wine that will lower the wannabe cult wine prices and collapse brands into narrower pricing bands below $50,” Mr. McMillan wrote.
Steps wine-related businesses have taken to weather the slowdown in fine-wine sales include renegotiating grape contracts and ending less important ones, trimming farming costs, increasing grape yields to bolster per-acre revenue, offloading excess bulk wine, developing marketing and sales programs for slow-selling items, adjusting blends for reserve wines to increase value in lower-priced wines, according to the report. Workforce reductions also have been part of the cash-conservation measures.
The bank plans to release a longer version of this report in spring.
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