Bad Nose: The Wine Industry's Rosy Assessments Begin to Turn

Breakdowns are starting to occur in the wine establishment's monolithic spin-control machine that has been telling investors and the rest of the world that there is no wine glut and will be no wine glut despite ample facts to the contrary.

There is a "slight excess" of wine, according to Steven Fredricks, vice president of Turrentine Wine Brokerage, in San Anselmo, Calif. As a result, he told the annual Vineyard Economics Seminar in Napa last month that vintners' marketing costs are rising, some grape growers are signing contracts at lower prices and consumers are beginning to see lower wine prices and higher quality selection.

None of this is a surprise to Drinks and Diversions readers, who have been reading about this for months. But for an industry that excels in denial, a public confession, no matter how small, is significant.

Additionally, bulk wine brokers have told D&D that there is more than a slight excess of wine on the market, so much in fact that prices have fallen 20% and more. Indeed, industry newsletter Wine Business Insider reported late last month that private wine giant Kendall-Jackson was quietly renegotiating long-term contracts with many of its growers, a clear sign that an oversupply is upon the industry and also that contracted grape prices are worth only the paper upon which they are written.

The latter could have significant implications for Scheid Vineyards (SVIN), whose projected income is based on prices in its long-term supply contracts with giants Canandaigua Brands (CBRNA) and the United Distillers and Vintners unit of Diageo (DEO).

A number of securities analysts who follow the wine industry are fond of telling their clients that an excess of wine does not result in lower retail prices. However, prices are clearly dropping, and to have an authority of Fredrikson's stature publicly talk of it presages more to come.

It also blunts the unrealistically rosy spin of analysts, like Banc of America Securities' David Goldman, who are fond of telling people that there is no link between supply and retail wine prices. Indeed, at the same vineyard industry seminar, Barry Bedwell, president of the industry's largest grower's cooperative, Allied Grapegrowers, said that if the industry cannot grow consumption fast enough to meet supply growth -- at least 7% annually -- then both growers and vintners will be forced to cut prices. As D&D pointed out in February, overall wine consumption grew at only 2% in 1998 over 1997. And while higher-priced premium wines increased at close to 7%, they represent only 20% of the market.

Compounding this is a global wine glut forcing down wine prices worldwide. In France, premium-quality bulk red from Bordeaux is going unsold at the equivalent of $1/liter (under $4 per bottle retail). And, as D&D wrote in March, imported wines are gaining market share in the U.S., leaving more and more domestic wine homeless and further aggravating the coming glut.

While top brands such as Beringer Wine Estates (BERW) and Robert Mondavi (MOND) are somewhat insulated from glut-induced price declines, Bedwell told the symposium that: "I don't believe they are totally bulletproof."

Barring a global weather disaster that helps drain the wine lake, the months ahead will see lower retail prices and higher winery marketing costs that will begin to squeeze the industry at every level.

Divertissements

Just three days before D&D profiled the huge debt loads of Canandaigua and Beringer (and after we had repeatedly called both companies for comment -- with no success), Canandaigua conducted one of those cozy little secret earnings calls with analysts to announce that it was trying to refinance its debt load to reduce exposure to interest rates. According to Salomon Smith Barney analyst Jennifer F. Solomon, about $1 billion of Canandaigua's $1.4 billion debt is on a floating-rate basis. An SSB research-call note authored by Solomon said that, assuming a 40% simple tax rate, the Fed's recent 25-basis-point rate increase would decrease earnings by 8 cents a share.

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