The Wine Collector

About two weeks ago, Will high-end wine sales rebound? was published by the Santa Rosa Press Democrat (in the heart of Sonoma wine country).  The headline is not specific to California but the article and the point of view of the newspaper is.  As you might imagine, I have an opinion.

Selective pain for producers

Before I dive in, it's worth noting that the difference of opinion about the future of CA high-end wine sales noted in the article is directly related to the uncertainty about the future state of the economy.  History shows that there's always a rebound and most market-watchers are confident this time is no different. But if one steps back from the macro-level picture, the future recovery will not be felt equally by individual California wine producers.

Top cult brands ($250+/bottle) will recover

The top, established cult brands will be fine. WinePrices.com's California 100 Index of the most frequently traded California wines at global wine auctions is up 7.1% year-to-date through June (new stats incorporating the September start of the Fall auction season will be calculated by mid-October).  The index's value is still down about 22% year-on-year to June 2009 but it's climbing back.  It's worth noting that the 100 wines in the index include 20 different producers although 5-6 dominate half the list.

Fate of those selling above $100/bottle will vary

How many readers know a wealthy individual who started a winery in the past five years to produce a high-end California cab?  I know plenty but I also suspect there will be a lot fewer such people going forward and that many of the "less committed" among them will throw in the towel.  That's good for the rest of the players as one of the problems in this $100-$250/bottle category is too many producers, all with a "story," well-known winemaker, expensive packaging (heavy bottles, wooden boxes), and a high price tag. It used to be that new producers earned their stripes (and price increases into the $100+ range) through delivering consistent year-to-year quality at fair price points instead of skipping to the head of the line by opening the cash spigot to create a high-priced trophy wine in record time.

Wine collectors who buy these $100-$250 wines will open up their wallets again as the economy enables them to (as some part of many purchases in this price range is the status it signals to others) but there will be less blind faith in speculating just to have the latest wine your friend doesn't.  Anyone paying this price also expects quality every time so inconsistent producers in this price range will have nowhere to hide.

Feast or Famine at $50-$100

This zone is "drinking territory" for many wine collectors but also where wine collectors have far more choices on where they spend money.  I suspect there will be many "feast or famine" circumstances where those producers with strong longer-term customers will be fine and others with shorter track records will be scrambling to sell their productions absent some strong reviews that provide some confidence of a sound purchase.

Bottom line: Wine collectors of California wine are in for a period of relative price stability as the opportunity for producers to raise prices (as many did year after year given abundant demand) is not likely to return for several more years.  But I believe spending on high-end California wines will return with the domestic economy and forward-thinking California producers (even modest sized ones) will begin cultivating foreign consumers more aggressively (especially in Asia).

Ever wonder whether you're permitted to bring wine to a restaurant and what the corkage and other wine-related policies are?  Now there's a new free (ad-supported) website called GoBYO.com (also see their iPhone app) that is essentially a restaurant guide viewed through the eyes of wine lover.  Read the story on the Springwise.com site titled Guide to BYO-friendly restaurants.

The site provides a variety of ratings including a composite restaurant rating from multiple online guides, a most popular list, Yelp ratings, and perhaps most importantly for readers of this blog, the "Wine-Friendly Rating."  The wine-friendly rating formula covers the basic wine policy and its restrictions (if any), corkage fee levels (over $20 is the worst category), the number of wines offered by the glass (50+ is highest score), and whether the restaurant's wine list is online and if it's at least 50 wines.

Today's Wall Street Journal had a story titled "As Champagne Fizzles, Makers Squash Supply." A few items in it caught my attention:

• Champagne producers collectively agreed to pick 32% fewer grapes and reduce bottles produced by 44% this year in attempt to prop up Champagne prices in the wake of falling demand.
• An industry source estimates there are more than 1.2 billion bottles sitting in warehouses.
• Annual sales peaked at 339 million bottles in 2007 and might be 260 million this year so 1.2 billion bottles is a 4-5 year supply.  In other words, this "problem" was already building prior to the recession.

Supply and demand constraints

The fundamental law of supply and demand is at work.  Normally, lower demand with constant supply would lead to lower prices but there seems to be a collective view by the producers that this is unacceptable (something that we see with California high-end wineries too). In the face of limited levers to boost short-term demand and a reluctance to let prices fall, the only solution left was to cut production (as they have done).

What if prices were allowed to fall?

Let's consider the advantages of allowing prices to float downwards to a new equilibrium:

• Demand would rise, helping erase the oversupply situation.  When the economy recovers, a smaller supply overhang will enable prices to bounce back sooner.
  
• Champagne would avoid losing market share to other sparkling wines and still wine substitutes that may be hard to recover later.
• The Champagne category could use more price-competitive offerings to grow base consumption and attract new consumers amongst people who might otherwise not drink Champagne.  "Habits" or preferences once formed tend to persist so there's the potential for a long-term gain in consumption from cultivating greater consumption with lower prices.

What's your view?

If you were a Champagne producer, would you vote to cut supply or allow prices to fall?  I know every consumer and wine collector would choose the latter.

UPDATE: On September 12, the WSJ magazine published a story on the plight of the Champagne industry called Bubbles Take a Bath.  It's worth a read.

I'm pleased to announce that Vinfolio has raised $4.5mm in a series A preferred stock investment led by Panorama Capital (see press release). We're thrilled to become one of a handful of venture-backed businesses in the wine industry in what is a very difficult fund-raising environment.  The enormous potential of Vinfolio's Marketplace to create a new supply channel for fine wine drove the investment decision along with Vinfolio's Asian expansion opportunity.

This brings the total equity capital investment in Vinfolio to approximately $14 million.  The first $9.5 million came from a combination of initial funds I provided and two rounds of outside investment from individuals.  So while this is a Series A round, it is not a typical one given the amount of prior investment.

The good news for wine collectors and enthusiasts is that the additional financial resources enable us to continue our ambitious development plans on multiple fronts.  We're all looking forward to focusing our full energies on the business once again.