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The Wine Bubble
By Robert Whitley
Dec 2, 2008
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Of course the economy is affecting the wine business. It would be naïve to think otherwise. I see it every day, from the worried faces of wine reps I bump into from time to time to the anecdotal whispers of severely 'allocated' wines that are now, suddenly, available.

Lost in the panic since the collapse of Lehman and talk of a bailout for the Big Three is the now obvious fact that a wine 'bubble' existed long before the credit markets unraveled. My good friend Bertrand Hug, proprietor of the iconic Mille Fleurs in the tony neighborhood of Rancho Sante Fe, Calif., saw this coming at least a year ago.

I was having lunch when Bert sat down to chat, and the conversation inevitably turned to wine. He was worried about the high prices. When a restaurateur in one of the wealthiest neighborhoods in America worries about the high price of wine, the wine industry should stand up and take notice.

'Over $100 a bottle on the list, it doesn't move,' Hug told me. 'It just sits there in the cellar. Between $60 and $80, I can sell them two bottles.'

Something had changed. Bertrand Hug has been in business in the same location for about 30 years. He wouldn't have stocked so much of the high-priced spread if there hadn't been a market for it. But that market dried up.

I'm sure the economy shoulders much of the blame. When the stock market was rockin' and real estate values were increasing by double digits every year, the feeling of wealth abounded. In the finer restaurants, Napa Valley Cabernets at $400 and up were a common sight. If you could peruse a good wine list and snag an A-list red for less than $200, you were anointed a connoisseur.

Real estate prices have been falling going on two years now, and the spare-no-expense crowd may have been slow to respond at first, but it is now clear those prices won't fly in this market. No how, no way.

So where does the climb-down begin? I noticed the latest release of Phelps Insignia is out at $200, down from $240 a year ago. That's a start, but it's not the Phelps' or the Montelena's or the Opus One's that are likely to feel the pain. Those wineries and their ilk are well established at the top of the pyramid.

During the great run-up in prices through the 1990s, everyone hopped on the bandwagon. As icon wineries raised prices, they dragged second- and third-tier wineries along. One vintner at a modest Napa winery told me he once poured his top wine, a $50 cab, for a guest in the tasting room and was promptly asked, 'C'mon, where are you hiding the good stuff?'

Kinda made every wannabe on the block think he had to have a $75 or $100 Cabernet to pass muster with the easily impressed crowd that always asks about the price before deciding whether or not a wine is any good. What's worse, most of the newbies who entered the business over the past ten years tried to capitalize on the growing popularity of wine and came in at the top of the price pyramid.

Wineries that were still waiting for the paint to dry in the tasting room were introducing inaugural vintages that started at $75 and up. It has been pure insanity. And it would have been difficult to sustain even if the economy and real estate had remained white hot.

So what's next? First of all, let me say not everyone drove over the cliff. There are always sane folks like Stuart Smith of Napa's Smith-Madrone Winery. Stu and his brother Charlie have been making Cabernet and Chardonnay (and a bit of Riesling) on the steep slopes of Spring Mountain in St. Helena for a quarter-century or so.

Stu's the guy who has to go out and sell the wine, so he's held the line on price even as his neighbors throughout the valley have climbed way out on an increasingly shaky limb. Stu sells the Smith-Madrone Cab for $40, and it's a tremendous value by Napa Valley standards.

'I'd rather sell all of our Cabernet at $40 and have an empty warehouse at the end of the year than sell it for twice as much and be sitting on inventory I can't move,' Stu once told me. He's sitting pretty now.

Others may not be so lucky. Evidence that wine consumers have pulled back is abundant. Tasting room traffic in the Napa Valley over the Thanksgiving weekend was down anywhere from 20 percent to 35 percent, depending upon your source. Restaurateurs I know report a significant increase in corkage fees collected, as more and more customers bring in their own wines.

Many restaurants have simply stopped buying wine, content to whittle down existing inventory and conserve precious cash, even though the holiday season is typically the busiest of the year. Those that are buying are steering clear of the big-ticket wines.

In these tough times, consumers need to have a strategy and exercise patience. Know this: Excess inventory will be unloaded, probably at a steep discount. This will show up two ways. The first is the most obvious.

Big buyers such as Costco will take much of the most expensive stuff and pass along the savings to you. If you live in a state where Costco is permitted to sell alcohol, visit the wine section early and often. The best deals won't last. If there is no Costco or Trader Joe's in your neck of the woods, look for a purveyor with a similar business model (buying on the cheap with a small markup for quick turnover).

Second, keep an eye on the negociant brands, such as Cameron Hughes. Cameron is one of the sharpest around when it comes to 'bulk' wine purchases. He buys excess 'lots' from top producers and packages the wine under his own Cameron Hughes label -- at considerably less than the parent winery would charge. The savings can be huge.

This model is important because many wineries will feel the need to move inventory but won't want to lower prices on their core brand for fear they'll have trouble restoring those margins in the future. So they'll anonymously sell a larger-than-usual portion of their stocks to negociants.

Retailers who sell these repackaged wines are generally asked not to reveal the parent winery in an attempt to move stocks of an unknown negociant wine, but many of them do. Just ask!

Whether or not prices will come down permanently and a modicum of fiscal sanity will be restored, I can't predict. I can only hope. What I do know is this: There are going to be some great deals out there, and you can surely find them.

Email Robert at whitleyonwine@yahoo.com.