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Realities of Wine Quality and Pricing : <<or e-mail badinage between industry friends>>

Wine for Sale Below is an email conversation whose volleys reflect the realities of making and selling special products in our market. We all walk the fine line in our free market system between profit and loss, the push-pull dynamic of supply and demand determining success. (Jim's voice is in italic. Harry's voice is in red.)

Original Message
From: Jim
To: <harrypn@ chehalemwines.com>
Sent: Monday, March 05, 2001 10:19 AM
Subject: concern on the east coast


Harry, For the first time since we began selling Chehalem, I’m concerned about our ability to continue building the brand in our markets. Unfortunately, the price points we’re now looking at only work when wineries get ‘big’ scores. Here’s an overview of where I see things. ...Jim

	Thanks for the thought-provoking email. I can understand some perceptions, agreeing with some conclusions and feeling a need to discuss several points. .... Please find my comments below. ...Harry

Pinot Noirs All of these wines are 30+ dollars on the shelf. In our primary restaurant market the wines are over 30 dollars to the restaurant. For stores to buy, we will need scores of 93 or better...as ludicrous as that sounds. The stores just aren’t laying in wines at this price point like they do at a mid-20 number. For restaurants, it’s largely moot. No Oregon Pinot Noir is going to move fluidly off of a restaurant wine list at 65+ dollars per bottle. Chardonnay These are now 20+/30+ wines and the category is unbelievably saturated. In the store world, Chardonnay has become commodity-ized, unless you are Kistler. It’s just difficult to get people stacking Oregon Chardonnay at these price points, and having the wine sit on the shelf is...just another wine sitting on the shelf. ...Jim

	You have done a great job of selling Chehalem and building the brand so that it is understood in style and approach in the marketplace. You have been one of our top 3 distributors for the last 3 years running. We appreciate it and definitely want to discuss anything that makes sense strategically. ...Harry

Understood ....Jim

	Pinot Noir: I understand that price increases are not popular …ever. It is undoubtedly easier to sell a $20 retail bottle than a $29 bottle. I also understand that there is a general climate of price increases from domestic sites and that, compared to very competitive import wines you are bringing in, it takes work to define and teach the merits of those wines from a value perspective. For Willamette Valley Pinot noir (which is only us for you at this point) it is somewhat easier to understand and justify current pricing if you consider the following: Vintages: the 1998, 1999, and 2000 vintages are excellent in quality, perhaps the best we’ve seen, with maturing vineyards, maturing winemakers, and better technology and understanding. Even the Wine Speculator et al.have yet to give less than a 91 to any of our 1998s. Supply and demand requires price respect, based on quality and based on reduced amounts available for sale — we think you also benefit from moving consistent dollars, even if case quantities might drop. So you know, we have adjusted prices downward in our history, coming off our last PR vintage (1994). We also do it by adjusting volumes or percentages of single-vineyard or reserve wines relative to 3 Vineyard based on quality (e.g.,the 1999 3 Vineyard contains all our Corral Creek Vineyard; is 4x the volume that 1998's very short vintage gave us and in 2000 will be 150-200% higher still). ...Harry

I understand the above, but that doesn’t necessarily mean that the economic ‘necessities’ are comprehensible in the marketplace. When I look at the above, I worry that 3-tier distribution just may not work for the Chehalem business model. Won’t be the first time. But if that is true, why increase production? It would seem that there are two models: one is, keep down all costs that don’t pertain to quality, keep down production, allow the market to discover you and sell at low cost as directly as possible. The second is, grow at price points that allow resellers to make money. Currently, my fear is that we can’t make money doing what we’re supposed to do — by building brands for our suppliers. Maybe there’s no answer to this and it’s just a waiting game to see what comes out in the wash. ...Jim

	93 or Higher: You’re right, the higher the score the easier to sell even with high prices. All our 1998s have been 91-93 in most reputable publications, depending on who you read, sell by, or trust. We DON’T make our wines for them and know that our wines show better with age than even those scores (see our Library Tasting results, from a previous newsletter). I have bragged about you guys not depending, like most of the rest of the country, on selling scores (or perhaps better taking orders), rather building brands and trust with accounts based on palate and a wine’s merits. Even if everyone is forced to sell scores, I don’t consider the difference between a 91and 93 as significant. ...Harry

Generally speaking, we refuse to sell with scores. But, that only works at certain price points. Once one enters the stratosphere (north of 30/bottle), the buyer inherently changes both from a retailer and consumer point of view. Essentially, the retailer buys if he thinks the stuff won’t sit (i.e. there’s pre-existing demand). This is especially true now that the bubble has burst on the economy. While I don’t view the difference of a 91 and 93 to be at all significant qualitatively, it’s enormously significant in the world of ‘retailer elevator lines’ for the ‘collector.’ Much as it makes me sick to think of it (it’s after all, anti-wine), I believe this is the reality of the marketplace right now. ...Jim

	Cost: one of the tools to guarantee quality of cool climate wines is crop load management, by which we work with 1.0 - 2.5 tons per acre to achieve very good quality in all vintages (compared to 4-6 tons or more in most CA regions); sometimes Mother Nature provides the green harvest, such as in 1998 with half crop yields in our vineyards of 0.8 to 1.8 tons per acre (Ridgecrest was 1.4); in 1999 we chose to drop to 1.4 tons per acre in Ridgecrest again (other vineyards were slightly higher), both vintages being exceptional in quality but hated by our accountants. When the main cost of wine is grapes, the impact of having 3-4 times the grape cost compared to other growing regions is not slight, especially coupled with small scale farming here similar to Burgundy, not CA. Oftentimes, OR pinot noir prices resemble Burgundy, not because of pretense or the assumption that we’re achieving parity qualitywise with the best Burgundies, but because it costs a certain amount to make pinot noir in the right place and in the right way. And our best are excellent even compared to the BRG standard. In summary, last year we made a profit of $XX,XXX, the first ever — and the winery books don’t include the heavily loss-prone vineyard activity, just winery. Not exactly Mercedes Benz territory. ...Harry

I understand this. But I think my response to this is not unlike my response to your first point. ...Jim

	Chardonnay:There is a flood of chardonnay, so I understand the difficulty in differentiating ours in the market.We are staying with the variety and actually growing the volume while others here abandon the variety. We love the Dijon clones and think you can’t get more European chardonnay character than ours.You’ve done a great job with it in the past. Is there new resistance? The price hasn’t really changed that I can remember, since we’ve been with you. We think they are well worth it, but maybe not for specific markets. If yours are looking for “cheap”arietals, we probably are not going to fill the bill. Again, the small farming scale and closely controlled, hand-made aspect of cool climate wines does cost. Here again, we don’t need a huge amount moved and actually don’t have huge allocations, but look for your usual intelligent match-making of retailer/restaurant to selected Chehalem wines. ...Harry

This is achievable, I think, especially given the nature of our portfolio. The difficulty here is with our markets, the restaurant business isn’t exactly setting the world on fire. But, we will try and make this a focus. Talk to you soon, Jim

	I ’d be very interested in your thoughts and any strategy suggestions; I will be in town for my daughter’s birthday May 2nd, if you have any time to talk then at your home. Regards, Harry

Sounds good. Give me a date and we’ll get together and evaluate what’s happened between now and then. Jim