EDB Sonoma County. Economic Development Board. Industry. Wine Industry Insider 2009

Transcription

1 EDB Sonoma County Economic Development Board Industry Wine Industry Insider 2009 E c o n o m i c D e v e l o p m e n t B o a r d C o l l e g e Av e n u e S u i t e D S a n ta R o s a C A

2 EDB Sonoma County Economic Development Board

3 Sonoma County 2009 Wine Industry Insider Report

4 EDB Sonoma County Economic Development Board With Acknowledgment and Appreciation to Local Key Businesses Supporting Sonoma County Economic Development: Chairman s circle: Underwriters: County of Sonoma General Services, Real Estate Division County of Sonoma Board of Supervisors Sonoma County Permit & Resources Management Sonoma County Health Services Sonoma County Transportation & Public Works

5 Table of Contents 2 Executive Summary 3 Moody s Economy.com - Recent Trends 5 Moody s Economy.com - Graph Analysis

6 2009 Wine Industry Insider April 2009 The Sonoma County Economic Development Board (EDB), in partnership with the Sonoma County Workforce Investment Board (WIB), is pleased to bring you the 2009 Wine Report. Our research partner, Moody s Economy.com, produced this report for the EDB. Highlights from the 2009 Wine Report include: The 2008 grape crush declined for the third straight year since the record-setting 2005 tonnage, which increased grape prices and limited growth of wine inventories. The 2009 production is predicted to be similarly reduced, as California s wine grape growing areas are experiencing a third year of drought and accompanying water usage limita tions. Domestic wine sales and consumption achieved record levels in 2008, its 15th consecutive year of sales growth. U.S. wine exports increased 8%, up from 6% in Shipments to Canada and Hong Kong experienced the most growth, as those to South Korea and Switzerland slowed the most. U.S. wine imports declined slightly. The fall in fuel prices, roughly 50% since summer 2007, has reduced production input costs for grape and wine producers, helping the industry during a time when price increases may pose significant challenges. Direct shipping composes less than 10% of all wine sales, but may offer a potential outlet for growth. Interest in wine e-commerce has increased, and new distribution channels are opening. Consumers are shifting away from high-priced wine purchases; high margin on-premise sales, such as those at restau rants, fell sharply in the second half of Wine drinkers and retailers are shifting to value, putting downward pres sure on wholesale wine prices for local wineries. Some wineries are adapting to the shift by upping production of lower-priced wines. Long term industry prospects are good: per capita consumption of wine has been rising steadily since the early 1990s; weekly wine drinkers have increased since 2000; and the U.S. is projected to pass Italy as the top consumer of wine by 2012, in terms of total volume consumed. o Thank you for your continued interest in the Economic Development Board s research. As always, you have questions or suggestions, please feel free to contact us at (707) Sincerely, Ben Stone Executive Director This information is presented as a convenience to the public, and should not be the sole source used in making business decisions. Individuals/businesses should consult with recognized professionals regarding their specific business issues involving economic data. Copyright 2009 by the Sonoma County Economic Development Board. No part of this publication may be reproduced in any means without the prior written approval of the Sonoma County Economic Development Board.

7 Moody s Economy.com - Wine Industry Recent Trends. The U.S. recession and the resulting changes in wine consumers behavior are altering the economic environment for Sonoma County s winemakers. A smaller grape crush in 2008, caused in part by frost damage, increased grape prices and limited growth of inventories of wines amid falling demand for the county s high-priced wines. The outlook for the Sonoma County wine industry in 2009 is for limited unit sales growth and the continuation of consumers shift toward value from high-priced wine purchases. Sonoma County s total grape tonnage dropped by 15% in 2008, marking the third consecutive decline from the record-setting harvest of Production of red wine varietals, Sonoma County s largest crop, fell by 21%; cabernet sauvignon, the largest component, fell 24%. White wine varietals fell a more modest 7%; chardonnay production fell 9% but sauvignon blanc rose by 9% the only major varietal to see a production gain in the county last year. Wine sales and consumption in the U.S. grew to record levels in Last year s gain in wine sales of 1.5% was well below expectations; however, it did mark the 15th consecutive year of sales growth. High margin on-premise sales (e.g., restaurants) fell sharply in the second half of last year amid a rapidly faltering economy and continued to fall in the first quarter of Exports of U.S. wines increased by 8% last year outpacing the 6% increase experienced in Shipments to the growing Canadian and Hong Kong markets contributed the most to the increase despite a strengthening U.S. dollar. Falling exports to South Korea and Switzerland provided the largest negative drag to export growth. Exports to the European Union, California winemakers number one export market, increased slightly. U.S. wine imports declined slightly in 2008, the first decrease in more than a decade, giving U.S. winemakers one piece of good news in a year of increasing negatives. Despite the weakening of the Australian dollar, imports of Australian wines experienced the largest dropoff in dollar value. Imports of Argentine wines, however, rose considerably. The severity of the U.S. and global recession is prompting many wine-exporting countries to curtail their 2009 production in order to avoid a worldwide glut of wine. Weather-related occurrences in Australia and Europe are further reducing expected production for this year. Consumers Rein in Their Wine Purchases Source: NIPA Real consumer spending on wine and brandy 3 mo. MA, % change year ago (R) GDP deflator for wine and brandy 3 mo. MA, % change year ago (L) As the recession deepened in the fourth quarter, consumer spending on wine faltered. Further, Sonoma County s higher-priced wines faced greater competition in an increasingly value-oriented market. Growth in spending on luxury goods such as wines and spirits began to slow in 2006 at the same time that the downturn in housing began. Expanding market share for high-priced wines kept overall wine prices rising until last year. Although unit sales of wines and spirits may continue to increase again this year, the dollar amount of sales will likely fall or remain close to unchanged. Growers Benefit From Across the Board Price Increases Pinot Noir Chardonnay Total Merlot Zinfandel Cabernet Sauvignon Sauvignon Blanc Average price per ton for Sonoma County, 2008, % change year ago Source: California Grape Crush Report Sonoma County s 2008 grape crush was smaller for almost all of its leading varietals, leading to higher grape prices and a decline in revenue for growers. Chardonnay remains Sonoma County s largest wine varietal in terms of revenue and quantity delivered to processors. Cabernet sauvignon, merlot, and syrah were the wine varietals with the largest reductions in production that contributed the most to negative revenue growth last year. Pinot noir contributed the most to revenue growth amid still-growing demand and surpassed cabernet sauvignon as the leading red wine varietal production by tonnage processed

8 Moody s Economy.com - Wine Industry 4 Stronger Dollar Increases Import Competition and Limits Exports Rising Savings Reduce Near-Term Spending on Luxury Goods U.S. dollars per local currency, 2006m1=100 Australia Homeowners who did not borrow against their homes Homeowners who did borrow against their homes Personal savings as a % of disposable income Euro Chile Argentina The spread of economic weakness around the world creates a disadvantage for Sonoma County wine exports to top international markets and will expand import competition here in the U.S. The dollar began strengthening against global currencies in 2008 as international investors sought refuge in U.S. Treasuries and other U.S. investments. The euro zone economy contracted in the fourth quarter of 2008 and will contract further this year. Latin American and Australia are increasingly feeling the impact of falling demand for commodities and, in the case of Argentina, high external debt levels. Renters The recent sharp rise in the saving rate across most households bodes ill for near-term discretionary consumer spending. A key assumption to the outlook for the consumption of high-end wines is that higher-income households will resume their pace of spending on luxury goods once savings are replenished and equity losses are at least partially offset. Spending on higher-cost consumer goods by middle-income households, represented in this chart by those who have borrowed from home equity, may never resume spending on high-cost goods at the same rate as in the past, posing some longterm downside risk to Sonoma County winemakers. edb.org Macro drivers. The U.S. economy is slipping further into its deepest recession since the Great Depression. The outlook is for additional economic contraction through most of Job losses will increase as a result of declining consumer spending and falling business activities. The loss of wealth due to falling house and stock equities is leading to weak consumer spending across all income groups. Further, a lack of inflation makes it very hard for any makers of consumer products to raise prices. One positive factor, however, has been the fall in fuel prices by more than 50% since last summer, taking some weight off of consumers and significantly reducing production input costs for grape and wine producers. This will help the industry to get through a period in which price increases may be very difficult to push through. Consumers are reducing their purchases of luxury items in favor of increased consumption of lower-priced value items amid uncertain economic times. An increase in the savings rate nationwide is an immediate cause for concern as households pare back spending sharply. Even more so for Sonoma County s wine industry, as well-off households are among the greatest savers at the moment. But longer term this may turn to a positive as they replenish savings, readjust cash flow, and then return to fulfill a measure of pent-up demand for luxury or near-luxury consumer goods. Industry drivers. Climate conditions are shaping 2009 to be another year of reduced production. California s wine growing areas are in a third year of drought. In March 2009, California declared a state emergency and ordered state agencies to expedite water transfers to needy areas. State officials estimate that agricultural losses due to the drought could total $3 billion this year. Direct shipping offers a potential outlet for Sonoma County winemakers amid a declining retail and restaurant market for high-priced wines. Direct shipments now represent less than 10% of all wine sales; however, obstacles to growth still exist. Despite the 2005 Supreme Court decision that prohibited states from blocking direct shipments of wine from out-of-state wineries, restrictions still exist in 15 states. In early 2009, Michigan banned all direct wine shipments by both in-state and out-of-state wineries, but other states, including Illinois, Kansas and Maryland, are considering proposals that would partially loosen existing

9 Moody s Economy.com - Wine Industry limitations on direct shipping. Interest in wine e-commerce is attracting new distribution channels despite the existing regulatory barriers. Last year, The Wall Street Journal partnered with Direct Wine Limited, a U.K. wine direct shipment company, to launch wsjwine.com for U.S. consumers. Amazon.com is expected to begin offering direct wine shipments in 2009 with Napa-based New Vine Logistics. Existing barriers will continue to offer profit incentives for companies to develop e-commerce and logistics systems to service customers in states that still restrict direct wine shipments. These companies stand to benefit as interest in wine e-commerce expands in future years. Falling tax revenues and growing budget deficits the result of weakening state fiscal conditions may result in higher or new state taxes on the sale of Sonoma County wines. While California the largest wine market in the U.S. ultimately dropped a proposal that would have increased its per bottle tax on wine from $0.04 to $0.30, 20 states are still considering raising consumption taxes on wine and other alcoholic beverages, potentially putting downward pressure on wine sales On the other hand, in moves to raise tax revenue, Connecticut, New York, Texas, Utah and Washington are proposing to liberalize laws concerning where and when wine and other alcoholic beverages can be sold. These measures would have the potential to raise unit sales of wine and partially offset the effect of increased unit taxes on Sonoma County wines in other states. Pricing. The shift to value by consumers and wine retailers will continue to put downward pressure on wholesale wine prices for Sonoma County wineries. Wine distributors are discounting the price of existing inventories to retailers, offering price cuts as low as 30% below regular prices. Retailers, responding to growing demand for mid- and low-priced wines, are leveraging additional discounts; in some cases they are purchasing directly from wineries. Price discounting will increase pressure on Sonoma County wineries to renegotiate contractual grape prices with growers in order to reduce growing wine inventories and to reverse market share loss to lower priced wines. Retailers of wine will continue to pass along wholesale price cuts to consumers and will respond to greater demand for value. Retail sales growth for wines priced from $11 to $20 a bottle outpaced sales of bottles costing more than $20 by more than fourfold in 2008, according to Information Resources Inc. Sales of boxed and other alternatively packaged premium wines are outpacing bottled wine sales in terms of growth, albeit from a smaller base. Premium three-liter wine sales accounted for 1% of total retail wine sales last year, according to the Nielsen Company. The continuing drought in California and the pullback in production in wine-exporting countries will reduce the chance of an oversupply of wine in 2009 and thus provide some floor under the sharp fall in prices. This is a marked departure from previous U.S. recessions when downturns in demand coincided with an oversupply of wine. Operating expenses. The smaller grape crop in 2008 boosted prices paid by grape processors. Prices rose by 7% in Sonoma County, outpacing the statewide increase of 4%. Prices for red wine varietals increased by 9% while white wine varietal prices increased by 7%. Labor costs are beginning to ease, particularly for grape growers. The recession is helping to stem the outflow of field workers to other industries such as construction, eliminating worker shortages. The Sonoma County unemployment rate increased to above 8% in January 2009 from below 5% a year earlier. Job losses in the construction industry--3,000 workers since the middle of are projected to continue through Further, a warmer than usual January allowed grape growers to accelerate the start of pruning with smaller crews, thus avoiding the need to hire larger crews. Growers are increasingly using contract pruning crews instead of hiring directly in order to reduce labor costs further. Winemakers in Sonoma County are managing their expenses by cutting their workforces. Jackson Family Wines eliminated 170 jobs in January amid falling sales of its high-end wines and deep discounting of its lower-priced labels. International wine and spirit companies Constellation Wines and Foster Group have eliminated positions, signaling the difficulties facing the industry. Profitability. The shift in consumer demand to inexpensive wines is spelling trouble for Sonoma County wineries specializing in high-end wines and who are geared toward high margin restaurant sales. Restaurant wine sales declined by 5% in 2008, according to The Nielsen Company, in contrast to a 7% increase in retail wine sales. The deepening recession will extend this trend as consumers reduce their spending at restaurants and dine more often at home this year. Some Sonoma County wineries are positioning themselves to benefit from the shift in wine consumers preference toward value. Red Truck Wines will begin selling threeliter wooden barrels of wine in Sam s Club stores in Wineries outside of Sonoma County have stepped up their production of low-priced wines and their acquisition of low-priced and financially distressed wine producers. Ruby Tuesday Restaurants added bottles of wines from California wineries to their menus in February 2009 priced as low as $10 a bottle. In 2009, the dollar is not expected to reverse its appreciation of last year against the currencies of most countries that export wine to the U.S. Prior to 2008, Sonoma County wineries benefited from the depreciation of the dollar in both domestic and overseas markets. The dollar is now fairly valued versus the euro and is not projected to strengthen further in Weakening economic fundamentals in Argentina and South Africa make their currencies the most likely to depreciate further among wine-exporting countries. Argentina announced in March 2009 that it will cut the export tax on wine in half, giving the country s growing wine industry a boost and adding more competitive pressure on Sonoma County wines. In March, the labeling agreement allowing the use of traditional expressions such as chateau and vintage on U.S. wines exported to the European Union expired. Retailers in Europe are allowed to sell off their remaining inventory of U.S. wines labeled with the traditional terms imported under the expired agreement. edb.org 5

10 Moody s Economy.com - Wine Industry Long-term outlook. Demographic Upside risks. Efforts to curtail productrends suggest healthy longer-term pros tion and additional lost production as a result pects for the Sonoma County wine indus of severe weather in the Southern Hemisphere try. The Wine Market Council reports that and in Europe may help stave off a global per capita consumption of wine has been oversupply of wine and reduce the chances for rising steadily since the early 1990s, rising further severe price discounting. Longer term, to a new record of three gallons per person some upside potential for wine exports is in Core wine drinkers those who possible as the dollar is expected to depreciate consume wine at least weekly account moderately versus Asian currencies after the for 16% of the total population but 91% of financial crisis subsides. In particular, China consumption. The share of core consumers and India are the best overseas prospects for has risen from 2000 to 2008 after holding continued growth of consumer demand. The steady through the 1990s. Chinese yuan is expected to appreciate further Per capita consumption in the U.S. is against the U.S. dollar in coming years, helping still well below rates in Europe, suggesting to increase the affordability of Sonoma County ample potential for growth. The U.S. is pro wines. jected to pass Italy as the top consumer of wine by 2012, in terms of total volume consumed. The increase in consumption will be fueled by younger generations primarily generation X-ers now aged 33 to 44 and the growing number of the larger millennial cohort now aged 15 to 32, many of whom are now reaching the legal drinking age. Both groups are increasing their consumption of wine while aging baby boomers are decreasing theirs. Downside risks. An extended recession beyond 2009 has the potential to generate a more substantial decline of wine consumption in the U.S. and abroad. Sonoma County wines are particularly vulnerable to the loss of additional market share if wine consumers and restaurants continue to trade down to lower-cost domestic and imported wines. More importantly, over the long term, an extended period of job losses nationwide accompanied by very weak income growth across a range of industries and occupations, particularly among the demographic groups that follow the baby boomers, could cause a structural shift in consumption patterns. This could lead to slower growth of wine consumption and a permanent shift in demand toward value, harming Sonoma County s producers of fine wines. Eduardo J. Martinez March , Moody s Analytics, Inc. ( Moody s ) and/or its licensors. All rights reserved. The information and materials contained herein are protected by United States copyright, trade secret, and/or trademark law, as well as other state, national, and international laws and regulations. Except and to the extent as otherwise expressly agreed to, such information and materials are for the exclusive use of Moody s subscribers, and may not be copied, reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold, or stored for subsequent use for any purpose, in whole or in part. Moody s has obtained all information from sources believed to be reliable. Because of the possibility of human and mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. UNDER NO CIRCUMSTANCES SHALL Moody s OR ITS LICENSORS BE LIABLE TO YOU OR ANY OTHER PERSON IN ANY MANNER FOR ANY LOSS OR DAMAGE CAUSED BY, RESULTING FROM, OR RELATING TO, IN WHOLE OR IN PART, ERRORS OR DEFICIENCIES CONTAINED IN THE INFORMATION PROVIDED, INCLUDING BUT NOT LIMITED TO ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES HOWEVER THEY ARISE. The financial reporting, analysis, projections, observations, and other information contained herein are statements of opinion and not statements of fact or recommendations to purchase, sell, or hold any securities. Each opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein.

11 EDB Sonoma County Economic Development Board

12 EDB Sonoma County Economic Development Board With Acknowledgment and Appreciation to Local Key Businesses Supporting Sonoma County Economic Development: Chairman s circle: Underwriters: County of Sonoma General Services, Real Estate Division County of Sonoma Board of Supervisors Sonoma County Permit & Resources Management Sonoma County Health Services Sonoma County Transportation & Public Works