When you don’t need a cab, they are all over the place. But, when do you need a cab, they disappear -- or they are all committed. I am not talking here about yellow cars in the city but about cabernet sauvignon vineyards in the North Coast.
The supply side of the wine business is cyclical. Sometimes it whacks you on one side of the head -- excess -- and sometimes on the other side -- shortage. This produces a kind of balance but there really must be a better way. We figure that it now takes about 14 years to complete a cycle, with roughly seven years of excess and seven years of shortage. Of course, consumer trends and economic factors on a global basis can make parts of the cycle longer or shorter.
Our company has been informing our clients about these cycles for many years, because playing the cycles well is critical to wine business success. Of course, every cycle is different and each variety is in a slightly different position. The biggest challenge is that it is very hard for people to believe, when supply has been short, that it will become long again and, when the market is long, that it will ever be short again. The "flip" can occur quickly and violently and can hurt those who have not planned for it.
The market for cabernet sauvignon in the North Coast, especially in Napa and Sonoma counties, was on the verge of flipping in 2008, but the worsening recession intervened and moved the market in the opposite direction. Over the next couple of years, consumers increased total wine consumption slightly but traded down in price point, or the bottle price they were willing to pay. Winery sales to restaurants declined due to both fewer consumer purchases and to depletion of restaurant inventories and reduction of the number of wines on the list. Wholesalers also reduced inventories.
Because of these trends, wineries had to reduce casegood inventories. Some very strong brands were able to do this mostly by opening up new channels. Others were forced to discount casegood prices and sell off grapes and wines in bulk, usually at prices below cost.
This caused the luxury markets to become temporarily oversupplied, and prices for grapes and bulk wine dropped dramatically. However, this oversupply was due to a vigorous response to the recession and not to overplanting. In fact, in the last few years, there has been very little planting even though sales increased.
Although the economy remains weak, premium wine sales at retail have slowly improved, and the 2011 crop appears to be down from 2010 for almost all varieties. Bulk market supplies of cabernet sauvignon, especially, have been mostly snapped up. Buyers late to the grape and bulk wine markets are left with limited selection and higher prices. Crop size will, of course, affect the market each year, but as long as consumer sales continue to grow, the "flip" to relative shortage is likely to persist until enough new acres are planted and come into production.
Of course, it has not been an ideal situation for growers either. Mother Nature has been playing hardball with rain at harvest last year and rain during bloom this year. Grapevines are self-pollinating -- bees aren't required -- so wind and rain during bloom hinders pollination and reduces crop size. Most of the growers I have spoken with agree the 2011 North Coast cab crop is down at least 15 percent.