Overextended North Coast vintners face credit challenges amid lower wine values
While the 2019 North Coast grape harvest ranked only sixth largest ever in tonnage, it followed the record-sized 2018 crush that brimmed winery tanks just as the trajectory of wine sales growth was starting to flatten.
Full tanks and ratcheting down of expectations for wine sales growth have sent pricing for grapes and wine vintners already have crushed down to levels about half of what they were just a year ago. While this means that consumers are expected to eventually get great deals on wine at the shelf, it is also affecting how much vintners can leverage the value of existing wine to operate.
“Most of our clients still experienced growth last year,” said Charles Day, North Coast regional manager for Rabo AgriFinance. “The negative attitude (in the wine business now) has a lot more to do with looking at reduced (sales) expectations against inventory levels that are pretty high from the harvests we've had in the past couple of years.”
‘A LOT OF HIGH-PRICED INVENTORY'
But hits to vintner top-line revenue and pressure on gross margins isn't something that has emerged yet, he said.
Margin pressure is expected to be largely from the entry of more negociants and primarily on wineries heavily selling through the U.S. beverage alcohol three-tier system post-Prohibition of producer, wholesaler and retailer. Negociant is a historical French term for vintners that buy wine from producers in bulk then package it for sale at retail under a negociant's labels or at wholesale via brands created for retailers.
“In the case of Napa cab, you've got people who are not only sitting quite a bit of inventory, but honestly sitting on a lot of high-priced inventory,” Day said. “The prices they paid for it in '16, '17, '18 was at pretty high prices. The expectation during harvest of those years was that you'd be able to pass along those price increases. I don't see that happening in this market.”
In December 2018, excess Napa Valley cabernet sauvignon wine was selling in bulk for $25–$40 a gallon, with wine from the best appellations priced at the top end of that range, but in February 2020 it was selling for $18–$25, according to Turrentine Brokerage. Pinot noir from the choice Sonoma Coast and Russian River Valley regions was selling for $12–$14 a gallon at the end of 2018, with top-end vintage 2017 pinot fetching $2 more a gallon, and is now going for $7–$9. And chardonnay from those Sonoma County subappellations went from $12–$15 to $7–$9.
‘PERFECT STORM' OF CAPITAL WOES
A common tactic to finance the expansion of production storage to handle a swelling inventory of grape juice headed through vinification toward the bottle is tapping working capital, but that could lead vintners into a “perfect storm” of credit challenges, according to Clay Popko, North Coast regional banking executive for Santa Rosa-based American AgCredit.
“A lot of operators will see a line of credit that's not being used, so they do long-term winery improvements or buy barrels on that line of credit,” Popko said.
That becomes a problem because instead of using credit lines for production of the asset being collateralized (wine inventory), the borrower has spent it on storage of that inventory, he said. Such fixed assets would have been better served by a term loan matched to the service life, which typically three years for barrels.
“Then once they've tapped out their credit line, they come in for a loan,” Popko said.
WHEN INVENTORY GOES ‘STALE'
Two other interrelated challenges with winery working capital is not only how the value of collateral has changed with market conditions but also whether that inventory has become “stale,” the definition of which lenders typically negotiate with vintners based on the style of their wines, Popko said.
“It is very difficult to sell or liquidate wine that is out of vintage,” he said. “If all the others are selling 2018 chardonnay, and you are trying to sell 2017, it sends a message.”
That's where the individualization of the lending relationship comes in. A given wine may have a recycle cycle that's a vintage behind similar products on the market because of added aging or other brand approaches.