Rabobank recently hosted a wine industry event in Paso Robles to discuss the economic effects of the recession on both the sale of wines and vineyard real estate.
Headlining last week’s event was Rabobank’s wine industry expert Stephen Rannekleiv, who works along with 80 other analysts in their Food and Agribusiness Research Group. Attending the event were winery and vineyard owners from across Paso Robles, including Stacie Jacob, executive director of the Paso Robles Wine Country Alliance.
Although those in the audience were no doubt hoping to hear some good news, in the end there wasn’t much to toast. While admitting that he was “less optimistic than many,” Rannekleiv estimates the industry will continue to struggle through next year, and expressed doubt about whether American consumers will ever return to their extravagant spending habits.
“I think the wine industry is fairly well split, with half the crowd saying things are going to turn around and things will go back to pre-recessionary spending patterns, and the other half saying, no way, there’s been a structural change,” Rannekleiv said in his presentation.
Netherlands-based Rabobank has offices in 45 countries and 93 branches in California.
Looking back, both Rannekleiv and a second speaker, vineyard appraiser Tony Correia, pointed to the run-up in home values that spurred the increase in wine sales — and the increase in vineyard property values.
“Using their homes as ATM machines,” Rannekleiv said, Americans increased the sale of premium wines by 20 percent alone in 2007. Those sales dropped off a cliff this year, with sales of bottles costing $25 or more of wine dropping 30 percent.
With the dramatic decline in household wealth in the last year, Rannekleiv said consumers are much more conservative in their spending, and the pricing environment for wines has become extremely competitive.
That spending has also been dramatically cut at restaurants, with sales at wine enthusiasts’ favorite Morton’s Steakhouse off 26 percent this year.
“Consumers are looking for value at a price point, they’re looking for good deals,” he said. “But they’re not just looking for the cheapest price, they’re looking for good value at whatever price point they’re willing to buy at.”
Correia agreed. “Cheap is chic,” he said. “The question is: Is that a short-term or a long-term phenomenon? Is this the new normal?”
The Napa Valley, Rannekleiv said, has been hurt the most. In a survey of retailers that gauged what they were buying and from where, retailers indicated they were buying less Napa wine than in the past.
In those numbers there was good news for Paso Robles, which scored the highest in the ratio measuring spending trends. He also pointed to numbers that indicate people are traveling much less to Napa in favor of less expensive regions, including the San Luis Obispo and Paso Robles areas.
“Paso Robles is outperforming a lot of the other California wine country destinations,” Rannekleiv said. Napa hotel room revenues are down by 20 percent this year, and while local hotels are suffering in San Luis Obispo County, revenues are down 5 percent by comparison.
Rannekleiv said he believes tasting rooms are the one “bright spot” in the economic picture for the wine industry, but he said wineries have to better leverage that opportunity.
“One of the problems is that we’re seeing increased traffic in some areas, but it is becoming more challenging to get them to sign up for wine clubs,” he explained. “They’re having a harder time making sales.”
Another area discussed in the presentation was real estate and grape prices over the past dozen years.
Correia said grape prices have been affected recently by large expansions of vineyards in Australia and Argentina, which have pushed bulk grape prices significantly lower and lowered the value of the wines from those countries.
That in turn has a downward impact on vineyard properties here, because the value of grapes now overall is lower, and banks are looking at the “operating economics” of the vineyards.
“There have been very few sales throughout the Central Coast since about this time last year,” Correia explained.
“A lot of the sellers are in denial.”
He noted that banks, though still reluctant to loan money, are willing to if the deal makes economic sense. That’s a challenge for many of today’s vineyard properties.
Bottom line, both speakers agreed that the “worst recession since the Great Depression” has hit the California wine industry hard, and although the last few months have shown improvement, it’s going to be a long road back.
“It’s very likely that we’re looking at a very slow recovery,” Correia said.
Rannekleiv said his best advice was, “Be prepared for either a good, or a very soft future moving forward.”
Janis Switzer can be reached at 434-5394 or via e-mail at firstname.lastname@example.org.