Recession-Proof Wine?
You may find the slight hint of a weakened dollar, the fragrance of rising oil prices and a slight aftertaste of a housing crisis when evaluating your next glass of wine.
Respondents to the Silicon Valley Bank’s 2008-2009 Wine Conditions Survey called a recession the greatest current threat to sustained profitability in the wine industry. About 500 wineries – large and small – from throughout the West completed the survey this past March.
More than 31 percent of small wineries, those producing less than 1,000 cases, were fearful of a recession’s impact to their business. About 47 percent of large wineries, those producing more than 100,000 cases of wine, said a recession was the biggest threat. Wineries that fall between those two bookends, which includes most of the wineries in the Pacific Northwest, held similar views that a recession would be bad for business.
The weakening economy is expected to force value-conscious buyers to the low- to moderately-priced brands. About 60 percent of the respondents to the SVB survey sell wine with an average shelf price between $15 and $40. Restaurant sales also are expected to slow during the downturn.
Just look to Willamette Valley Vineyards to see how the economic downturn combined with rising fuel prices is having an effect on the bottom line.
Oregon’s only publically traded winery, based south of Salem, began the month of May by announcing record profits for 2007, up 31 percent to nearly $1.7 million on $16.7 million in sales. But the company ended the month by reporting earnings had fallen in the first quarter of 2008 due to higher fuel costs and fewer restaurant sales among other reasons. The company posted first quarter sales of $60,000, or 1 cent per share, on sales of $3.4 million, compared with earnings of $234,000, or 5 cents per share, on sales of $3.6 million in the same quarter last year.
Washington and Oregon follow California as leaders in the number of wineries, where every state can now claim at least one winery. The number of wineries in Oregon and Washington has dramatically increased in recent years.
Oregon has had a 72 percent increase in the number of licensed wineries since the start of 2003, according to the Oregon Liquor Control Commission. The commission reported issuing 373 winery licensees currently, compared to 216 winery licenses on Dec. 31, 2002.
In Washington, the number is even more dramatic. The Washington Liquor Control Board reported a 107 percent increase in the number of licensed wineries between the end of fiscal year 2001, with 248 wineries, and the end of fiscal year 2007, with 515 wineries. Another 20 wineries have been added to the list.
In Washington, the wine industry contributes an estimated $3 billion annually to the state economy. In Oregon, that amount was estimated to be about $1.4 billion in 2006. Idaho and Canada’s Okanogan Country also have growing wine industries.
The financial impact stretches from the vineyards to the restaurants and retail stores that sell the bottled wines, and also includes hotel employees and others that cater to the growing business of wine-related tourism. A MKF Research study commissioned by the Washington Wine Commission and Washington Association of Grape Growers estimates about 19,000 jobs with a payroll of about $579 million in Washington are connected to the wine industry.
That sort of exposure has some wondering how a national recession, stated or implied, will impact the industry. In the 2001 recession, the industry reported a drop in sales growth from the low to mid-20 percent in early 2001 down to 5 percent growth by the end of 2002. But the industry continued to grow, as it steadily has since the mid-1990s.
“Despite the current and well-reported down-trending economic conditions in the U.S., we feel the next 12 months will be generally positive for the wine industry as a whole,” the SVB study reported.
The biggest reason for this, the report suggests, is that many in the industry foresaw a downturn in the economy and adjusted inventories accordingly. Also, demand has outpaced supply for some grapes, such as Oregon’s Pinot Noir, and a recession-induced drop in demand wouldn’t be too disastrous. Overall, the SVB report found that 80 percent of industry respondents said they have either adequate or short supplies in the cellar.
“A recession is upon us and sales growth rates will likely moderate,” according to the report. “That said, the negative impact will be winery specific and depend on several factors including price points, brand strength, appellation, volume produced, and most importantly, the sales strategy.
“Yet overall, wine is still an affordable luxury even in a bad economy. So while wine is not recession-proof — like electricity and visits to the doctor — people still continue to consume wine even during difficult times, and our experience is that wine continues to demonstrate volume growth.”