NORTH COAST -- This year is shaping up to be another challenging one for the wine industry on the North Coast as signs of recovery in the U.S. economy and consumer spending slowly take hold, according to an economic report released today.
"The health of U.S. consumers will improve in the near term but is still some distance away from a full recovery," wrote Ed Martinez, senior economist with Moody's Economy.com, in the industry report prepared for the Sonoma County Economic Development Board.
Key indicators of that health are retail sales, personal savings rate, consumer confidence, stock market indexes, home prices and household net worth. They have improved from the depths of the recession a year ago but remain below levels at the start of the economic recession at the end of 2007, according to the report.
For example, the savings rate for the first two months of this year was 3.1 percent, which was lower than the 3.9 percent average for the first half of 2009.
"However, expectations of weak-at-best economic and labor improvements weigh on any outlook for an end to consumers' flight to value in the near term," Mr. Martinez wrote.
Unemployment rates in the U.S. and Sonoma County were 10.4 percent and 11 percent in February, compared with 7 percent to 8 percent for both a year before, according to government statistics. That is projected to decline starting next year.
At the same time, personal income is forecast to grow at less than 2 percent this year.
The shift to lower-priced wine has been dramatic for wine sales last year and is expected to continue this year, according to the Moody's Economy.com report. A key measure of high-end wine sales has been restaurant and other on-premise sales, and that sector has been hammered, with sales in that channel off 6 percent to 9 percent overall last year, according to industry analysts at Gomberg Fredrikson & Associates.
The drop in sales for mid- to high-priced wines was more dramatic, reaching 20 percent to 30 percent, according to North Coast wineries contacted for the Sonoma County report.
"For smaller wineries, the combination of falling sales and accumulating inventories has been damaging to their balance sheets," Mr. Martinez wrote. "The number of defaults and foreclosures of wineries in the North Bay wine-growing areas surged last year."
Distressed sales of wineries or vineyards, what he calls "bargain transitions," are an inevitable and necessary part of the business cycle, according to Rob McMillan, founder of Silicon Valley Bank's Premium Wine Division and author of the institution's annual industry economic forecast.
He affirmed his initial prediction in a forecast preview in November of more such "transitions." The 2010-11 Silicon Valley Bank wine industry forecast is set for release in early May.
"It's not a V-shaped recovery; it's a long L," Mr. McMillan said last week. "Everything we see right now is improved business top line, but it does not speak to profitability or nationally the economy being improved and all the other echoes of the crash lingering in the background. So there is still some pain in the economic process."