Wine and the economic downturn: a sense of paradox

It’s a story about the Emerald Inn in the New York Times that got me thinking about the whole, strange relationship between wine (and booze in general) and the economy.

You see, the Emerald Inn is a historic pub from New York’s Upper West Side that was supposed to close in the spring, because its rent was set to more than double in the red-hot Big Apple real estate market. Until that market tanked, and the owners saw that they’d never get a tenant who could pay that much. The owners traded down a bit (but still raised the rent), and so the Guinness will keep flowing, and the customers will keep drinking. And everyone seems happy. And if they’re not, they’ll probably be drowning their sorrow in an extra pint anyways.

Which is a bit what has been happening in the wine business over the holidays. Under a bit of a knee-jerk reaction to all the economic bad news, people have been trading down the scale and buying less expensive wines – less champagne, more under 20$ bubbly. Except that, in one of those great paradoxes in human behavior, customers have been buying more of these less expensive wines. A lot more, even, thereby offsetting the savings they were apparently looking for:

At Wine.com, a large online alcohol retailer, the average price of a bottle of wine sold in December 2008 was 17 percent below the average price of a bottle sold in December 2007 — but the number of bottles sold was 15 percent higher than a year ago.

In the UK, a similar phenomenon took place, according to a Decanter story, even though the value of sales was down significantly for some retailers, despite the increase in volume. I don’t know, maybe the expensive wines were even more margin-inflated in the UK than in North America.

Could that kind of move be putting more pressure on the high-price wine producers? Could there be hope for us mere mortals of getting a hold of a bottle of top Bordeaux, Burgundys, SuperTuscans and Napa Cabs for more reasonable prices?

Maybe, if you look at Bordeaux futures. The 2007 campaign has met with less than shining success, with the 2007s being sold for almost 80% more than the 2004s, even though the wines weren’t up to snuff, according to an article I read in the November issue of La Revue du vin de France.

Maybe not, if you look at the wine-as-an-investment scene, which a Globe and Mail feature, last October, showed as buoyant. Apparently, with the financial and housing debacles, top wines look like a better investment, as prices at auction continue to rise. The article by Beppi Crosariol also points out that the really high-end stuff is on allocation, anyway, and that demand greatly exceeds supply, at this point, so the producers could just shift allocations according to demand.

Mind you, that was last fall, when the Conservatives, in Canada, still argued that the country wouldn’t be affected by a recession, and that the US recession wouldn’t be a deep one. A late-December story in the Wine Spectator pointed out to an 8 percent decline in the value of wine auctions, in 2008.

How deep will the effect on the wine market be? A viticulture brief in the PressDemocrat, last December, showed that direct-to-consumer wine sales increased 2.4% in 2008, compared to nearly 14% the year before. Maybe I should ask more winery owners how they’re feeling the pinch at their end (feel free to comment here, guys), but my essential reaction to this bit of info is: it still grew. Of course, if the number of wineries grew by 10%, that would mean less money per winery, but that’s rather unclear from that particular bit of data.

How you fare in the current economic context may well have to do with where you’re located in the wine world. If people spend less in restaurants, they may buy more wine for home, a less expensive solution that would be no different for wineries, but quite hard for the restaurant industry.

As Wine Economist Mike Veseth pointed out, it may also depend on the price you’re selling at. If a buyer is trading down from 9$ to 7$ per bottle, the margins are greatly reduced by fixed costs that represent a large part of the retail price. But if higher-end buyers trade down from 30$ to 25$, the effect may not be quite as damning. Unless you’re a winery with a lot of debt to pay down, and you were counting on the growth of your higher-end products to give you the edge you needed.

In other words, it’s complicated. And thus, there will be much to discuss between wine-loving friends, over a bottle of wine at the restaurant. Or maybe three, served at home.

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