In his annual state of the industry general session at the 12th Unified Wine and Grape Symposium in January, industry analyst Jon Fredrikson told a rapt audience what everyone knew and no one wanted to hear: The California wine industry is in the throes of a serious economic setback. It has endured a financial "heart attack," in his words. Even as domestic wine consumption has gone up slightly, California wine shipments fell by close to 2 percent and were off about 3 million cases for 2009.

Each January, American winemakers and winery executives gather at Unified Grape, the annual trade convention in Sacramento. The state of the industry general session is always a highlight, a look into the crystal ball by a small coterie of market analysts, vineyardists and strategists. The heart of the message is always left to Fredrikson, of Gomberg, Fredrikson and Associates, one of the most respected watchmen of the industry, particularly in its largest sector, California. No one codifies the big picture quite like Fredrikson, described in one publication recently as "a walking barometer of wine industry trends."

For the last decade, his message has been overwhelmingly positive. Like a rote blessing from the pope, Fredrikson's annual prognosis has augured good fortune for an industry that's grown accustomed to market success. Consumer interest in wine, wine products, and in the pursuit of wine lifestyles, has enjoyed exceptional annual gains.

No longer. The demand for wine has slowed so drastically -- for high-end wine in particular -- that the industry faces one of the more challenging economic climates in its history.

Facing extra inventory

As Fredrikson explains, each segment in a complex chain that links wine to the consumer has ground nearly to a halt. Consumers are just spending less in general, but especially in restaurants. "People are not dining out at same rate, said Fredrikson in a recent conversation, "and they're not spending on high-end wines either. They're spending less, buying by the glass, buying beer."

Decisions like these impact not just sales, but visibility. "Let's remember that almost all Napa Valley wineries want to be selling in restaurants, not in food stores. That's where a brand can earn its prestige, where it can cultivate an image and so forth. So when the restaurant trade is off 6 percent to 10 percent, that's a major factor."

The slowdown has put the trade is in a conservative mode. "Businesses are seeking to reduce inventories at restaurants, at the distributor level, at the retail shops," he explains. "When the pipeline shrank, millions of cases backed up in system, which moved back up to supplier level. Suddenly they're looking at three to six months of extra inventory. That complicated the whole picture."

For years wineries had been chugging along at growth rates of 3 percent to 5 percent a year, Fredrikson said. In high-rent, high-profile locales like the Napa and Russian River valleys, that figure was closer to 7 percent or 8 percent, and spurts as high as 35 percent in certain sectors weren't unheard of.

It takes a tremendous amount of planning to manage that level of growth. Wineries must schedule for and budget plantings and fruit purchases. They must manage cellars, purchase tanks and expensive oak barrels, predict demand, and navigate the difficult pathways of distribution years ahead of a bottle of wine hitting the market. Even in good years, this can be a perilous bit of steerage; when the trend heads downward, it's very difficult indeed to redirect years of preparation.

A 'dream market' for consumers

"What happens when you get caught in that crunch?" Fredrikson asks. "You can't discount, you don't want to hurt your image, but your warehouses are loaded, and here comes the 2009 crush, an unexpectedly big crop." Something has to give.

To Fredrikson, it seems inevitable that prices will have to adjust to the new reality. "It'll be a while for some; they may rather go the route of quietly discounting. Others may face up to it. But at some point you have to liquidate inventory. You can't hold onto inventory and be a successful business, unless you're very wealthy." And holding onto wine for a long time may be an unwanted consequence of the current market malaise.

Not everyone is facing a challenge, however. "For consumers it's a dream market," says Fredrikson. "Bulk wine producers will be offered wine at a great price, sometimes below cost. And 2007 is one of the top vintages this decade, according to the critics. That means that your average consumer gets a great wine at a great bargain."

As he walked through the symposium's exhibit halls, Fredrikson was struck by the fact that despite the gloomy outlook, the place was jammed with participants. "You'd never know we were in a recession," he says. "Nobody's here in mourning clothes, and there aren't any coffins on display." Despite his own less-than-rosy prognosis, he came away with was a sense of optimism: "The message I've gotten from most people," he says, "is 'It's been a tough year, but we're surviving.'"

Patrick Comiskey is a senior contributor for Wine & Spirits Magazine where he serves as chief critic for non-California domestic wines and contributes articles on the wines of California, Oregon and Washington.

Photos: Jon Fredrikson speaks at the Unified Wine and Grape Symposium, top. Exhibitors at January's Unified Wine and Grape Symposium in Sacramento, bottom. Credit: Ken Freeze

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