Wine Prices Set to Rise Amid California Grape Shortage

Say goodbye to snagging fine wine at a value price.

Tim Graham | Getty Images

As demand increases and inventories experience an extended shortage, consumers will have to choose between paying more, trading down or buying foreign imports, according to a wine industry report released on Tuesday.

Silicon Valley Bank, which provides the wine industry with commercial banking services, predicts the fine wine business will see sales growth of 7 to 11 percent this year amid a looming grape shortage.

“I think the consumer for the past five years has been used to getting really fine quality wines at a good price,” said Rob McMillan, founder of the bank’s wine division. “But as the balance evens out, you can’t expect the producer to sell at a loss, which is really what they were doing.”

Although wines salesgrew most for lower-priced wines during the recession , sales in the $20-plus category rose the most last year as consumers began to trade up to pricier wines, according to IBISWorld. Changing tastes and wine's perceived health benefits are helping to fuel the surge in demand for wine.

While McMillan predicts that bottle prices will start to increase in 2012, he does not think they will jump to pre-recession price tags.

“The consumer now has to decide whether they like a better quality wine or they like a cheaper price,” he said. “That’s going to feel like whiplash to the consumer.”

To correct an oversupply of high-end wine during the recession, wineries had to move the excess supply through the distribution channel so later vintages could sell at a normal price, McMillan said. But inventories have since pared the excess supply, and several varietals are now experiencing shortages.

“This year, with the slightly small harvest, we have moved past being balanced into a position that’s trending to shortage overall,” the report said. “High-end Cabernet and Zinfandel are clearly short and the only varietals we view as being close to balanced are the usual suspects in Merlot and Syrah.”

McMillan added that some states will likely benefit from the supply shortage.

“Domestically, the states of Oregon and Washington should see the most benefit because there is a higher level of non-bearing acreage and land costs are more reasonable,” the report said.

Foreign suppliers are also forecast to profit as imports capture a larger U.S. market share to compensate for lacking domestic supply.

“As continuing demand growth in wine is starting to exceed our ability to fill from domestic sources, market share in total wine sales will be handed over to imports in 2012,” the report said. “The guess here is that growth will come from the EU countries.”

McMillan listed Argentina, Australia, France, Italy, Portugal and Spain among the countries that could help fill the domestic shortage.

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