Dr Vino's wine blog

Fred Franzia, the bulk wine producer from California known for wine-in-a-box among other travesties, has been a busy pumping out the wine recently. His Bronco Wine Co. produces wine under the Charles Shaw label, which now sells for $1.99 at Trader Joe’s grocery stores (although it sells for $2.99 outside of California thanks to the mandatory distributor intervention).

The wine has been flying off the shelves as some shoppers are buying 10 cases at a time according to an article on sacbee.com. One Trader Joe’s store manager in Sacramento said that the store sells 300-500 cases of Charles Shaw a day. The wine producer has reportedly entered into this exclusive arrangement with the grocery store chain to the tune of one million cases. That’s a lot of wine for one label.

This aggressive marketing strategy underscores one half of the current crisis for California wines: a grape glut. Acreage under vine has been on a steady increase over the past decade. As a result, the harvest (amount of grapes crushed) has grown by over 40%. For several years as supply was increasing, prices were also increasing, the best of both worlds. This year, in contrast, the overproduction has caused prices at the low end to decline in a commodity-like fashion as final demand has slackened. (click here for the crush data)

That means bankruptcies in the industry. In the first major boom and bust in this country’s wine industry during the 1870s, many farmers were forced to sell below their costs, which drove them out of business. In this current cycle, growers have already declared some of the first bankruptcies and it remains to be seen whether some wineries will also be forced to close as well. The invisible hand of the market is delivering the bulk wine producers and growers a powerful slap.

Customarily the wine market does not operate as one monolithic market, but instead as two distinct markets split between quality and quantity. A crisis on the low end in which prices decline can occur without affecting the high end. Regions, varietals, brands and vintages all serve to insulate the high end from the brutal price competition of the low end. The price of apples need not affect the price of oranges: a Cabernet Sauvignon from Napa Valley would not really be affected by a glut of Merlot in the non-descript central valley of California.

Or at least that is how it works most of the time. While the current crisis of overproduction in the US market has forced prices down for low end wines, the slowing economy has put pressure on the high end. As a result of these two troubles, many producers are bringing prices down. That should be joy for the rest of us.

However, economics alone does not drive wine prices for the American consumer. The key aspect of the US wine market is that even if producers lower prices, prices to the consumer may not necessarily decline given the various, entrenched layers between the producer and the consumer. This time consumers may just be in luck. Hopefully some distributors will be compelled to also clear their inventories and lower prices accordingly (although the Charles Shaw example does not provide much hope). High-end restaurants are even lowering prices as Amanda Hesser reported in the 12/25/02 New York Times. Retailers are also likely to run lots of sales and discounts over the next few weeks and months, typically some of the slowest of the year.

All is not lost for the US wine industry during this time. The industry has taken significant strides toward putting better wines in the bottle over the recent past. The downturn in prices combined with good quality could turn Americans—with some of the lowest per capita consumption rates in the world—into more regular consumers. That, indeed, would be the silver lining for the industry. But producers would be well advised to heed recent consumption trends that indicate consumers drinking “less but better” wine and not skimp on quality. In the meantime, consumers can get some welcome relief from snap up some domestic bargains from California.