Prices may rise this year, but grape prices will lag, expert says

By MATEUSZ PERKOWSKI

Capital Press

The discounting that has depressed wine and grape prices may be coming to an end, according to a bank that studies the wine industry.

Wine producers have been successful in clearing out their inventories of the product, which means they have less incentive to continue cutting prices, according to an outlook report from Silicon Valley Bank.

"We're past the bottom and starting to edge up," said Rob McMillan, founder of the Santa Clara, Calif.-based bank's wine division.

In the coming year, wine sales can be expected to increase by up to 15 percent in volume, according to the report. The industry is benefiting from the overall demand for luxury goods, which has grown as the stock investments of affluent consumers have rebounded.

Market research has shown that the top 20 percent of income earners in the U.S. are responsible for about 80 percent of premium wine sales, the report said.

McMillan said wine prices may rise slightly this year, with more improvement likely in 2012. Grape prices will likely lag bottle prices as wineries gradually renew or renegotiate contracts with farmers.

"The grape grower is the last one to see price drops and the last to see price increases," he said.

A survey by the bank found that 59 percent of wine producers expect to buy more grapes in the coming year and 64 percent expect to pay less for them, McMillan said.

"That's consistent with the bottoming out of the grape cycle," he said.

For that reason, it's a good time for wineries to lock in longer term contracts with crucial grape suppliers before competition gets more heated, McMillan said.

Consumers may also want to seize the moment, as major bargains won't last forever, he said.

When there's a demand shock like the recent recession, wine producers react by selling off high quality bulk wines for low prices, McMillan said. That discounting reverberates to lower bottle prices for quality wine.

The discounting trend is ebbing with established brands but is likely to persist with unknown labels, especially at this time of "continued brand proliferation," said Paul Mabray, chief strategy officer for the Vintank consulting firm, in an e-mail.

Branded wines also face a threat from store labels offered by grocers, he said. It remains to be seen "how many of the discount shoppers can be converted to wine consumers who will re-purchase at full price," said Mabray.