Sue and I are in Santa Rosa this week where I will be speaking to a meeting of Allied Grape Growers, a 500-member grape grower marketing association that sells more than $100 million worth of grapes each year. I am looking forward to learning as much as I can from the growers about what they are seeing in the grape markets today and how they plan to react.
Optimists and Pessimists
There are two schools of thought about what is happening to the economy, both here in the US and around the world. One school holds that we will soon face the most serious case of stagflation — inflation with slow or no growth– that we’ve seen in 40 years. These are the optimists!
The opposing school — call them pessimists or realists — holds that stagflation is already here (have you seen some corporate earnings reports?) but maybe we just don’t fully appreciate it yet. And it will get worse before it gets better.
Either way the near future promises to present challenges to everyone in the wine product chain with costs rising, consumer budgets getting squeezed, and a strong dollar disrupting international trade flows.
Waiting for Wine Prices to Rise
So far wine prices have not risen as fast as consumer prices generally, which have been up more than 8% on an annual basis in recent months. Wine prices (and beer prices, too) have risen less than half that, which means they have fallen in real (inflation adjusted) terms.
A recent Wine Economist column tried to think through what might happen (and why) if wine prices do eventually start to increase. But I am having real doubts that this will happen generally. Some wineries and retailers are likely to be able to raise price, but I am not so sure about the broader market.
The “Stag” in Stagflation
Why? Well, because this isn’t inflation that we are looking at, it is stagflation and distressed consumers (and the retailers who market to them) are likely to push back against price increases even more firmly than in the past. Yes, I know that premiumization has been one of the big trends on recently years, but premiumization is about buyers moving up to higher priced products, not paying more for the stuff they already buy. Rising wine prices? They still hate that.
Big box retailers like Walmart and Target are already feeling the squeeze as costs rise but prices don’t or don’t as much. Some reports suggest they are trying to protect margins by shifting even more to private label brands, for example. In any case the push back seems to be as strong as the cost push itself in many cases.
Retailers are feeling the squeeze. Will wine margins experience a big squeeze, too? That’s what I suggested in a presentation to the Wine Industry Leadership Conference. earlier this year and, with the ability to raise price in even more in question today, it seems to be a likely scenario.
Here is a link to my presentation on “The Big Squeeze” on wine margins at the Wine Industry Leadership Conference in February 2022. My presentation begins at about minute 38 in the video.