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The Crash of Golden State Vintners
By Lewis Perdue
Special to
5/9/99 12:18 AM ET

April 28, the day that Golden StateVintners
(VINT:Nasdaq) crashed, falling to $6 from more than $10, will likely be remembered as the industry's canary in the coal mine detecting the first signs of an impending wine glut. GSV stock left a fulminating crater the day after the company announced it would probably miss analyst earnings estimates of $1.22 by 15 cents to 25 cents because, according to a company news release: "the California premium bulk wine spot market has recently been experiencing softness in pricing and volume." GSV has since recovered somewhat, closing Friday at 7 1/4.

Softness in bulk wine prices, according to the industry customers with whom Drinks & Diversions has spoken, translates into a 20% to 30% drop in prices of California and North Coast appellation wines. The drop, according to wine brokers who are reluctant to admit that any softness exists at all, is a result of both red wines from 1997's record harvest and whites from 1998's runner-up record hitting the market.

"The prices of some of the trendier appellations such as Napa Valley or Sonoma Mountain are holding steady or showing some slight increases," said a Sonoma County negociant, or wine buyer, "but I could go swimming in all the cheap California and North Coast Appellation wines
available out there." He said he could only speak off the record for fear of being shut out by the wine brokers.

Golden State Vintners executives did not return phone calls on Thursday and Friday and said through their investor relations firm, Morgen-Walke Associates, that the company had no one available who could answer questions about the bulk wine market.

GSV's performance and the presence of an abundance of good wine with falling prices should be clear warnings, but no one seems to be listening. That's probably because of a blinding infatuation with the glitziest and most expensive wines and their producers. The relentless promotion by both
analysts and industry leaders that stress only good news and make predictions of shortages of wines at the high end of the wine world have created a false image of the industry's prospects.

To be sure, there are two worlds of wine. In the one where wine costs $10, $20 and $50 a bottle, sales are growing at 12% to 15% a year, and there may even be shortages of some types of wine. Then there is the other world of the under-$10 wine, where prices are dropping, tanks are filling with excess wine and volume sales are stagnant or even dropping -- all in advance of the 1999 harvest, which will be a monster unless the weather intervenes again.

Reality, however, is even more sobering.NewYork-based Adams Business Media says wines
selling for more than $10 per bottle account for just 5.3% of all wines sold in the U.S. On the
other hand, the numbers the industry prefers, those of consultants Gomberg-Fredrikson &
Associates, uses a different set of categories, which clouds the issue. G-F's figures show that
wines selling for more than $7 per bottle account for 19% of the volume and 44% of wine

That may allow too many in the wine world to play Dr. Pangloss, conveniently ignoring the
dominant, lower-end of the market and confusing investors further by referring to the glowing
prospects for the "premium" wine market. While most people think of premium as the upper crust,
in industry parlance "premium" is any wine costing more than $3 a bottle. No wonder investors
are conditioned to think only of pricier wines, which are still doing very well.

As a result investors deluded by hype, circumstance and wishful thinking perceive but one rosy
wine world and one truth. So when Golden State hit them with a dose of reality, they reacted by
dumping all over the stock. But no matter how much the upper crust would like to ignore reality,
their fates are linked both short- and long-term to wines in the lower-priced barrels.

According to both Gomberg-Fredrikson and the Wine Market Council, the languishing lower end
reflects two trends, both bad for the industry. The first is the relative paucity of newer consumers
coming into the market -- people who typically start with less-expensive brands. The premium
market is healthy only because the aging Boomers are moving to more expensive wines, keeping
the upper tier aloft, for a time. Some even worry that the current Boomer upscaling may conceal a
bust in several years when they start drinking less, as is typical with aging populations. In this
way, the current success of more expensive wines seems to have dulled the industry's hunger to
build its future market base.

Equally serious, the short term consequences are substantial for all of the big wine powerhouses
-- Beringer, (BERW:Nasdaq) Mondavi (MOND:Nasdaq) and Canandaigua Brands
(CBRNA:Nasdaq) -- who live and die by inexpensive brands. According to Beringer's last 10K,
almost 40% of their revenues come from White Zinfandel. That wine was selling for $5.99 at
D&D's local Albertson's supermarket two years ago, and has been going for between $4.99 and
even $3.99 for more than a year now.

Likewise, Mondavi's Woodbridge Chardonnay, which was sold out when it cost more than $8 two
years ago, is now plentiful, despite the fact that its price has fallen to $6.99. While wines at this
level are very competitive and generally rise and fall with supply, continuing signs of soft pricing
hold severe implications for the entire industry and its largest and most prominent players.

Next Week: The phenomenal success of Meridian, an upscale, $10 brand from Beringer and the
important branding lessons it has for both worlds of wine.
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