An old wine industry adage says that during good times, people drink. During bad times, they drink more.

Whoever came up with this saying didn’t come from Napa Valley.

With the economy on the skids, local vintners have suffered through wrenching changes in business even though — or especially because — the valley is one of the premium winemaking regions in the world.

The cheap wine is selling. But $50 Napa Valley cabernets aren’t making the cut.

“People drink more wine, but they only drink cheaper wine,” winemaker Mike Grgich said.

Grgich, the founder of Grgich Hills Estate, whose wines go for anywhere between $20 for his most inexpensive sauvignon blanc to $135 for his cabernet sauvignon, said his sales have plummeted 30 percent this year in California. Out-of-state sales have dropped by 50 percent.

Grgich has spent 50 years in Napa Valley, and he said he’s not seen conditions this difficult. “People in this recession don’t buy the wines that they used to, and the Napa Valley wines don’t sell,” Grgich said.

Drop-off in 2008

Winery sales in Napa County dropped suddenly during spring of last year after several years of steady growth, according to sales tax figures from the county. Napa Valley saw record sales in 2007 and the beginning of 2008, but by the second quarter of 2008 — months before the collapse of Lehman Bros. and billion-dollar losses in the financial markets — Napa Valley sales headed south and dipped to 2006 levels.

Industry insiders cite several related factors. Consolidation among distributors has made it more difficult for small producers, which includes many wineries in Napa County, to get onto restaurant lists and market shelves. Increased competition from Australia, New Zealand, Argentina and Chile is giving the wine buyer new options.

But the pain in Napa County — even in the face of increased wine consumption in the United States — appears to stem primarily from the fact that people aren’t buying expensive wine as they once did. High-end restaurants, many of which distinguish themselves with impressive wine lists carrying bottles from the most reputable regions, are seeing a significant reduction in wine sales.

Consumers are turning to cheaper alternatives, which feeds into the strengths of New World importers and large domestic wineries that bottle inexpensive brands from less prestigious regions.

A recent study by the Napa Valley-based industry research firm Wine Opinions indicated more than half of the wine drinkers in the United States are in a worse financial situation than they were a year ago. As a result, most are trading down to cheaper wines.

One-third of the people surveyed are buying more wines between $6 to $15 than they did a year ago, and

40 percent say they have cut back on wines more than $30 and are no longer buying anything above $50.

“The change in the last year has not been in the amount of wine but rather in the type of wine and where it is consumed,” said Ed Matovcik, an executive with Foster’s Wine Estates, which owns four Napa Valley wineries, including wine giant Beringer, and two in Sonoma County.

“Consumers are trading down in price, purchasing more from grocery stores and less at restaurants. Both factors have negatively impacted many Napa Valley wines that are sold at higher price points and primarily in restaurants,” he said.

Gary Fisch — a wine merchant with three stores in New Jersey who is a familiar figure at Auction Napa Valley each year buying rare and unusual wines for his customers — said the market is steering away from Napa Valley’s specialty.

‘Under $20 is great,’ said Fisch, founder of Gary’s Wine and Marketplace. ‘We’re selling more $10 malbecs than we’ve ever sold before.’

‘Dangerous place’

Counter to the trend, ultra-premium cult wines are going strong, selling just a touch slower than usual.

Bill Harlan of Harlan Estates, whose top cabernet is available only to club members and is listed for as much as $500 a bottle by online wine retailers, said the major impact has been that the waiting list has winnowed.

“The waiting period isn’t as long as it used to be, but the wines are selling out,” said Harlan.

Still, many local producers have a lot of extra wine on their hands.

That may mean fantastic deals for consumers as wineries slash prices to get their product moving.

But people in the industry worry that that discounting prices could tarnish the Napa Valley’s prestigious image and hurt prices in the long run.

“It’s a dangerous place to go,” said Deborah Steinthal, founder of Napa-based wine consultancy Scion Advisors. “I know quite a few brands are feeling the pressure, but they also know the long-term impact of discounting your product is huge, because it’s very difficult to climb back out of that hole.”

Fisch agrees that deep discounts could undermine Napa Valley wine values over the long haul, but he argues that it is imperative Napa maintain its share in the increasingly competitive global wine market, especially when other wine regions are offering huge discounts.

“My first choice is a Napa Valley cabernet, and I want (Napa wines) to succeed,” Fisch said. “But I have to be realistic. If I get a deal on a Burgundy that normally was $100 that now is $40, that’s where my cash is going.”

Terry Hall, communications director for the Napa Valley Vintners, an association of some 350 Napa Valley wineries, acknowledges the dangers of discounts, but adds that the industry has never faced an economic climate like this.

“In a typical day we would say when you discount your brand, it’s hard to get that dollar back,” Hall said. “However, in this economy, this is the Great Recession… I think we’re all discounting because we’re in the same boat.”

Just paying the bills

The wineries that have the least flexibility are the small producers who more or less sell out each vintage, the ones who aren’t prepared to pay for storage and need the cash to keep the business going.

“We’re seeing a lot of price adjusting going downward, and I’m not sure that’s necessarily healthy for the industry in the long term,” said Laura Zahtila, whose Calistoga winery Zahtila Vineyards produces about 2,000 cases a year.

“But in the short term, people are just trying to pay their bills. It’s putting a real pressure on me to follow suit, but I can’t afford to sell my wine at cost, so I’m holding my own, but it’s difficult.”

Zahtila — who said she is “awash in cabernet” this year — has chosen to reduce production by about half to save expenses.

That carries its own risks, in part because many predict 2009 will prove to be a strong vintage.

At an economic forecast seminar hosted by the Napa, St. Helena and Yountville chambers of commerce this summer, Carol Collison, vice president of St. Helena-based winery consulting firm Global Wine Partners, said, “By 2011-12, when people are seeing the 2009s, they are going to wish that they had made more wine.”

Zahtila acknowledged she may feel the pain later on. But, she said, “At some point you need to make sure you have the cash to keep making more wines.”

Dilemmas like these are why some industry officials say  it will be the older and more established wineries that come out of the downturn with the upper hand.

Grgich, for example, has already paid off his vineyard and has cash in reserve.

Though sales are down today, he said he can maintain prices and production levels until things turn around.

“If we don’t sell out now, the wine will improve,” Grgich said. In the meantime, “We’ll build more warehousing if we have to.”

It’s a good option for those who can afford it, but not everyone can.

“People who have good resources and aren’t too indebted are going to do OK,” said Kent Rasmussen, who owns a small winery on Silverado Trail in St. Helena. “Those who are depending on constant growth are going to have troubles.”

“The folks that had good treasure chests before the economic climate phase hit have the advantage right now,” Steinthal agrees, “because if you’re strong and able to carefully spend your money in the right places in your business, you’ll come out stronger in the next 18 months.”

In the meantime, many wineries are just doing what they can to tread water. Wineries are consolidating their portfolios, producing less expensive second labels, selling excess grapes and laying off staff.

“It’s the fundamentals,” Steinthal said, “getting back out there into the market, rationalizing your portfolio, scrutinizing the balance sheet on the income statement to see what you can turn into cash right now.”

Matovcik, whose company laid off 120 U.S. employees this year with most of them located in the Napa Valley, said there probably isn’t “a neighborhood in our county that doesn’t have someone who has been laid off from a wine-related job this year.”

Matovcik added that Napa Valley is still blessed with many advantages, but that the turnaround will not come easily.

“In hard economic times, consumers gravitate toward brands they know,” Matovcik said. “Napa Valley is fortunate to have many of these iconic brands that are familiar to wine drinkers around the world.”

But in this hyper-competitive environment when we’re competing with so many other regions, that’s not enough. It’s going to take an extraordinary effort to remain on top.”

Grapegrowers feel pinch

It’s not just the people who make the wines who are hurting. The guys who grow the grapes are also feeling the pinch.

“It’s an integrated economy,” said Bruce Phillips, president of the Napa Valley Grape Growers. “It’s not just a vintner industry. It’s a partnership between growers and vintners and everybody’s feeling the effects of this.”

Grapegrowers entered 2009 in bad shape already after a light crop in 2008. Then, when the economy plummeted, wineries stopped buying grapes.

“We had a lot of supply in 2009 that just wasn’t picked up,” Phillips said.

Wineries were forced to pull out of contracts and negotiate better terms with growers.

Rather than sell their fruit at a discount, some growers opted to leave their grapes on the vines to rot instead of investing in the harvest this year.

Unfortunately, Phillips said, it doesn’t look like things are going to turn around anytime soon for grapegrowers in Napa Valley.

“In 2010, I think vintners are still looking at a situation … where they’re going to be hard pressed to justify expanding their purchases,” he said.