Economy Starting to Squeeze Makers of Premium Wines

Premium wine may be an affordable luxury, but it’s not quite as recession-proof as California vintners thought.

The weakening economy is beginning to cut into sales of pricey wines at restaurants and hotels, analysts say, and is driving consumers to uncork less-expensive bottles of Chardonnay and Cabernet at home.

One of the country’s top wine makers, Robert Mondavi Corp., this week reduced its profit forecasts for the quarter and next year, citing slowing demand for high-end wines.

Wine, analysts say, just isn’t as immune from recession as Budweiser.

“Times have gotten tougher, and consumers are starting to cut back on some of the self-indulgent items,� said Kristine Koerber, an analyst with W.R. Hambrecht & Co.

It’s the first sign of a slowdown in California’s booming wine industry, which has grown rapidly over the last few years. But it’s far from a crisis, analysts say. And it could bring lower prices for consumers as wineries and distributors--facing stiffer competition from Australian and South American imports--cut prices.

“There will be greater competition for wineries fighting for market share,� said Karen Coleman, a consultant with wine advisory firm Motto, Kryla & Fisher.

Wine traditionally has been one of the last sectors to be hit by a soft economy, experts say, and it is usually one of the first to recover when things pick up.

And not all premium wines are suffering. Michael Mondavi, Robert Mondavi Corp.’s chairman, said his company’s wine sales have started to weaken only in the $25-to-$75 price range.

Its affordable Woodbridge brand, which sells for about $7 a bottle, and its prestigious Opus One, at $130, have been unaffected by the economic downturn, he says.

Robert Mondavi Corp. warned Thursday that profit in its fiscal first quarter ending Sept. 30 will equal last year’s profit of 70 cents a share. Analysts had been estimating 77 cents.

It also warned that the pace of sales growth would slow next year to between 13% and 15%, rather than the 16% to 18% the company had been expecting.

Shares of Oakville, Calif.-based Mondavi dropped $1.22 on the news, closing at $39.88 on Friday on Nasdaq. The stock is down 26% for the year.

The slump in premium wines comes after phenomenal growth in recent years, largely spurred by demand from baby boomers moving into their peak earning years. Sales of premium varietal wines costing more than $7 a bottle soared 168% to 38.9 million cases last year, from 14.5 million in 1995, according to data from Gomberg Fredrikson & Associates, a leading wine data firm.

But in recent months, some of the steam has gone.

Total sales of varietal wines costing $4 or more grew at an annualized rate of 8.3% over the last 52 weeks ended June 9, according to AC Nielsen. In the last 13 weeks of that 52-week period, the annualized pace of growth had slowed to 5.9%. (Recent figures are not available from Gomberg Fredrikson.)

Bannus Hudson, president of Concord-based Beverages & More, a wine and liquor super store, said the economic slowdown doesn’t mean people are drinking less. Sales are up at all 20 of his stores.

“We are seeing traffic pick up. Some people are just spending less. And there are so many great value products out there I don’t think [a weakened economy] is going to be much of an inhibitor.�

However, the softening economy is depressing traffic at winery tasting rooms in Napa and Sonoma counties, wine makers say.

“We don’t usually see this kind of softness in the summer,� said Sheila Romero, executive director of the Sonoma County Tourism Program, which has noted an 11% decline in hotel reservations so far this summer.

Thomas Selfridge, president of Napa-based Chalone Wine Group, which makes Chalone, Acacia and Carmenet brands, said wine makers are having to work a little harder to sell super premium wines, demonstrating their quality by winning awards and holding tastings.

“People will still pay $50 for a bottle of wine if they perceive they’re getting a good value there,� he said.

Some believe slackening demand could prompt further consolidation among California’s 900 wineries. Big wine companies such as Mondavi, Kendall-Jackson Wine Estates and Chalone could become even bigger and take a larger share of retail shelves.

“When the economy gets soft, customers get risk averse,� Michael Mondavi said. “They want to spend money on known, quality brands. They don’t want to take a risk on Chateau No-Name.�

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Reuters was used in compiling this report.

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Flattening Sales

Sales of premium wines, once thought to be recession-proof, are leveling off.

Source: Gomberg Fredrikson & Associates