The Whale is Gone?

WINE TALK
1

An article I wrote after I left Chambers Street wines. From January 2009.

It is long so I am just linking to my blog. Be curios to get some perspectives on this.

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2

Good article. The whales will be back… though maybe not as many and maybe not as hungry. But hopefully the good retailers weather the storm. I wonder what’s happening on the West Coast. Maybe some left-coasters ITB can weigh in.

Marty

3

I wouldn’t be so pessimistic on that front. It seems that in very few cases did the actual producers see any of the “whale money” so a price correction at the retail and middleman levels doesn’t seem likely to affect the incentive structure at the producer level. Bordeaux might be an exception but I always got the sense they weren’t in it for the money per se so much as the ego-stroke of selling for a higher price than their neighbors.

The other open question is if nobody is buying the $500 bottles, why there are still so many out there. A lot of people seem to be sitting on a lot of inventory. There are pages and pages of wine-searcher listings for 2006 DRCs. How much longer can that last?

4

A: I knew being pessimistic on that front was stretching it but wanted to keep in line with the spirit of the time then. All the Depression talk etc.

B: I have no idea how long it can last and what effect it will have.

5

Good read, thanks.

It will certainly be interesting to see how things play out. Shocked to read about Araujo going with a price hike in this climate, apparently some think the rough times have passed.

6

wondered why I was seeing all the Araujo for sale notices in the various Commerce Corners . . .
alan

7

perhaps the best-written thing of yours I’ve read yet.

8

Not gone. The whale(s) of '05, '06, '07 and the first half of '08 are not the whales of '09 because they’ve most likely seen a not insignificant erosion of their total assets, yet they still have their 20,000-200,000 bottle cellars. So, there is no reason to currently buy any wine. However, new whales always emerge; I know of a couple of them that have been purchasing significant amounts of high-end wine over the past 12 months. And in a few years, when the economy is steamrolling (hopefully) along, some of the old whales will re-emerge as well.

9

I can tell you one thing: the whales are not gone. They may be eating less and being picky about the food they eat but they are still eating nonetheless. From a retailer’s standpoint, like when playing with a portfolio of stocks, diversification is the absolute key. I have been through enough ups and downs to say that the big ups never go on forever and one always has to prepare for the inevitable down, if not trying to anticipate it. It means that concentrating too much on the whales when times are good (very easy to do and extremely common) and not paying enough attention to smaller but higher margins sales and core clients, or value wines, will unavoidably create problems when things slow down. One has to have a broad enough customer base and enough ammunitions to be able to ride the markets and that requires vision and smart moves on the buying end when things are flying high. The most common mistakes when the market is on fire is that store owners/principals, or whatever you want to call us, tend to do silly things and almost always get caught with their pants down. Investing too much into fad, fashionable wines that are here today and gone tomorrow (Spain, Australia, much of CA, sorry Dan not pointing at you really, as I have made some of those mistakes from time to time) or chasing too much stock of DRC, Le Pin, Ausone, when in the end there are only very few customers willing and able to buy those wines. Let’s not forget one thing: every major store in the country is chasing the same few buyers for the same high end wines and that’s a small pool. I know a few guys that have ZIPPO business today because of that and have a hard time re-inventing themselves.

So…when you have a solid retail business made up of bread and butter wines, a core clientele that will support you even during meager times, and you throw in a few skinny whales in the mix once in a while, at the end of the day you (and it may not be all smooth sailing) still got a viable business that will survive a downturn. That is obviously if you didn’t spend all the money you made during fat times on whores, cars, a 10,000 sq foot home, and toys. I know a few that did that and…BOOM!!

10

Ray,

Good to know there are new people emerging as the market does need balance and as Max points out some retailers need more of a balanced and long-term outlook based on ups and downs.

Herr Wright . . .danke . . .

11

I’ve always cultivated an enormous pod of voracious dolphins rather than feed the single, fickle maw of a whale.

Metaphors aside, the price categories above $150 are virtually dead. Couple this with massive discounting of brand wines and you’re seeing an onslaught of discounted wine well below that price range.

I agree with Lyle’s assessment of price ranges. The $5-$18 range is stable. The feeding frenzy is in the $18-$30 range. The “whale” feeding ground is $50-$100.

12

Last year [2008], Social Security was scheduled to go broke in 2017.

This year [2009], they upped the forecast to 2016.

BTW, Medicare goes broke this year [2009] - or maybe I should say, Medicare is going broke as we speak.

13

I’m going to leave this post…but let’s keep this about wine

14

“They are the lifeblood of these destination wine stores. These are the guys who buy those 2 cases of DRC or 1st growth Bordeaux every month and pay your bills so you, as the buyer/owner, can buy the wines you really care about. Every store I have ever worked in lived and died by the whale.”

That is COMPLETELY not true at our store (which is very much a destination store) and I would bet many others (Silver Lake, hell, even Kermit Lynch) as well. I often say that the guys who come in once every six months and buy three cases of Barolo, Tete de Cuvée bubbly, Soldera and Amarone THINK that they are the driving force of the wine industry but, in FACT, it is their wives, daughters, secretaries and personal assistants who come in five times a week and buy one or two bottles of $12-25 wine (which ARE the wines we really care about) that pay the rent and the payroll.

There are just so many MORE of them that their economic impact far outweighs the “whales” here and in many other destination stores.

“It won’t get easier for the retailer but I am sure it will be more rewarding as they will have to work harder for their money and know that the wines they believe in are putting a roof over their heads.”

That’s been our MO from day one 16 years ago…

15

Roberto,

Not to talk trade secrets about the stores I’ve worked in . . . .but all had bread and butter wines that sold very well but the big purchases really enabled us to continue. That is my experience. Yours sounds different. The whale was very important, regardless if they thought so or not.

16

Excellent post. From what I hear from my local retailers, Lyle’s post is pretty spot on. I know I have been offered things I never used to be nor had I inquired about them. I remain suprised by the high pricing in the system though. I worry that my retailers will not make it thru this bad economy without lowering prices. In Ohio, they cannot legally do that as we have mandated minimum markups. We are seeing distributors go under or sold, and they will take the retailers with them. All that will be left are mega-distributors and wines sold in grocery stores. That will suck.

17

Interesting write-up, Lyle (and I also didn’t realize you weren’t at Chambers anymore). I tend to agree with Ray’s take re: the whales – the market may look bad right now, but things will bounce back, and when they do, the buyers will resurface.

I guess one thing I was wondering about specifically related to the high end environment is the status of some of the newer California producers - you know, wineries with minimal track records that really cater almost exclusively to the $100 a bottle and up market. Maybe I’ve just missed the news reports, but one would think that wineries with that type of operating model are finding it very difficult to service their debt (assuming they have any) or generate any operating cash flow right now?

18

Bob,

Great question re: new CA ‘cult’ producers. My guess it that they are continuing to cultivate their ‘family and friends’ business as much as possible . . . and trying their darndest to troll boards like this to find potential customers [wow.gif] [foilhat.gif]

One other business I’ve been curious about is CrushPad - this downturn MUST be hurting them pretty badly as well, no?

Cheers!

19

I’ve found it is really hard to get real solid answers to any of this because if people talk about this, other people see them as perpetuating the problem.

20

I know for a fact that the cult/expensive producers here in the Valley are feeling the heat. Those that had waiting lists are burning through them. The others that sold through pretty quickly aren’t. Honestly, I think the only reason these are selling as well as they are in the specter of 2007 being incredibly special.