Increasing prices, foreign currency fluctuations portend shifts in consumption

By MATEUSZ PERKOWSKI

Capital Press

Winemaker Elliott Johns has noticed a bit more optimism among visitors to his family's Emerson Vineyards near Monmouth, Ore.

"It seems like they're feeling they've got a little money in their pockets," he said.

On-site sales have improved since the depth of the recession, and the company has fielded calls from new distributors interested in carrying its wines, he said.

Increasing demand is also evident in the tightening supplies of available bulk wine and grapes, Johns said.

Previously overstocked wine inventories along the West Coast are returning to healthy levels due to rising consumption and a slowdown in new plantings, said Rob McMillan, founder of the wine division at Silicon Valley Bank.

"Everything is trending up, no matter how you look at it," he said. "They have worked through that part of the cycle and now the cellars are in balance."

California seems to be heading into a shortage of wine, which will be advantageous to producers in Washington and Oregon still dealing with excess inventories, McMillan said.

"What at one point of the cycle is a liability becomes an asset," he said.

While the outlook is positive for grape growers and winemakers, shrinking wine inventories are expected to reverse a trend that has taught consumers to expect high quality at low prices, he said.

When the oversupply was heaviest, producers were steeply discounting wines and blending higher quality wine into "second labels" to "clear the decks," McMillan said. The abundance of good wine also prompted the rise of "private labels" sold at lower prices by grocery stores.

With less high quality wine around, the quality of such cost-conscious offerings is bound to suffer, he said. The impact on consumer behavior raises an important question.

"Are they going to continue to drink at that price point?" McMillan said.

Some consumers may follow quality wines to higher price points, but that process may be hindered by the slow pace of the economic recovery, he said. Other consumers may stop buying private labels and second labels, while some will begin experimenting with imports.

The sovereign debt crisis in several European countries is expected to weaken the euro, decreasing the price of exports from that region, McMillan said.

"The natural conclusion is we should see more imports, particularly from the eurozone," he said.

The danger for U.S. wine producers is that consumers may get into the long-term habit of buying foreign wines, McMillan said. "That's a segment of the population you may have a hard time clawing back."

The upside of the shakeup is that wines from Washington are well poised to gain from consumers seeking value, he said.

As previously underpriced wine from California becomes more expensive, drinkers may switch to Washington wines that offer reasonable quality at a lower price point, McMillan said.

That dynamic is different in Oregon, which has smaller wineries and is largely geared toward Pinot Noir, he said.

That variety isn't associated with high yields in the region, making it difficult to produce at low prices.

However, Oregon Pinot Noir is still priced more competitively than California Pinot Noir, which should help Oregon producers as supplies from California tighten up, McMillan said.