Spain's three billion litre wine lake

Strong euro and a drop in demand have plunged the industry into crisis. Alasdair Fotheringham reports from Gratallops

It's Saturday lunchtime in Granada, and by rights a decent wine bar such as El Ajo Blanco should be humming with satisfied customers downing a quiet glass of Rioja or maybe a lesser-known Somontano.

But no. For a good 90 minutes the bar is completely deserted. A middle-aged woman bustles in, but she's not staying: all she wants is a bottle of wine as a present. "We've lost between 40 and 60 per cent of takings on wine," estimates the owner, Nicolas Fernandez Unica. "Since the recession started, things could not have got worse faster. Ten years ago people would start drinking wine at lunchtime and then stick around for a glass or two afterwards. They'd come in on Mondays and Tuesdays. Not any more."

In Madrid it's a similar story in wine bars such as La Dominicana. These days beer is their top-selling product. "I tried to promote wine but I had to change tack," the owner, Angel Ibañez, tells me. "What with the recession, apart from the well-known wines like Rioja or Ribera, they're just not selling. Anything that costs more than €2.80 a glass I've ended up drinking myself."

Unofficial estimates say that wine sales in Spain, the third largest producer in the world, have dropped by about 10 per cent. But whatever the actual figure, the knock-on effects on the wine industry are so serious that the government has been forced to intervene. Twenty million litres of wine will be bought and converted into industrial alcohol.

But even that will resolve only one small part of the problem. El País newspaper estimated that 16 times that amount – 34 million hectolitres, in the industry's jargon – remains unsold. If all wine production stopped in Spain for a year, there would be only an 11 per cent shortfall. Cut to grass-roots level, and the effects of a wine glut and falling demand are varied. Last week in Barcelona at Spain's biggest food festival, Alimentaria, the country's best-known wine, Rioja, had a small but significant dent in representation compared with 2008 – down from 110 different brands to 92.

In the Castile-La Mancha region, however, which has the largest single area of vineyards in the world – roughly 500,000 hectares – they are running scared. An estimated 8.5 million hectolitres of wine are waiting for buyers. "The prices have plummeted and wine just doesn't sell," Jacinto Trillo, the president of one of the biggest wine co-operatives in the region, said recently.

Where markets seem to be holding up the best, though, is in exports, even if Rioja wine dropped by 8 per cent last year. In comparison, in the El Priorat region in Tarragona, which covers an area of just 1,680 hectares, they say they will weather the economic storm. "A few months ago I was concerned about losing my job," Guillem Sabater, a manager of El Priorat's leading co-operative tells me as he gazes over the acres of vineyards that surround one of the region's most important villages, Gratallops. "The number of orders from one of our main customers, the United States, has dropped a lot, and they've yet to fully stabilise. It's been worrying."

It's hard to believe such an idyllic rural scene could be facing such difficult times. "We used to get huge numbers of Spanish families coming in and buying top-class wines," says a sales assistant in a winery, who did not want to be named. "Now eight out of 10 of our customers are foreign, and the few Spaniards who come in always look at the expensive wines – then buy the cheapest."

"The industry is screwed," says Josep Ferrer, a local hotel owner. "Of course you still get the American tourists who come over on wine-tasting trips: if they can afford a ticket across the Atlantic, they can afford to buy the stuff. But here at home, interest in drinking wine is plummeting."

Abroad, shifts in the industry's fortunes are being closely followed. At Moreno Wine Merchants in Maida Vale, London, they've noticed only a tiny drop in UK consumption thanks to the recession. However, they recognise the producers are taking a hammering. "We've had a decrease of maybe 1 or 2 per cent in the high-level Riojas, but in Spain the industry is suffering a lot," says Abbi Moreno. "It's true that of all the companies we're dealing with, just one has gone under. But that's because they are producers with long-standing reputations. It's the newcomers that are worst off."

While Ms Moreno says the cheaper offerings from Spain are doing well, at a more local level, not all UK wine dealers are feeling the same benefits. "In late 2008, the euro suddenly got a lot a stronger," says Charlie Cotton of Bray Valley Wine in Devon. "The Italians dropped their prices in response, and the French by and large said it was not their problem. But the Spaniards upped their prices, and that was a killer."

Prices are slowly rising yet again in Spain, but overall consumption remains on the ebb. Meanwhile, the blame game has begun. "We need to get rid of the speculators," argues Mr Ibañez. "You can't just buy up some old vineyard, try to sell a wine that's €50 a bottle and claim it's a good vintage when it's rubbish. But it's what happens in a boom."

"Coming in and spending €300m on a bodega, as some of the new players have done round here, was a bit irresponsible," Mr Sabater says. "The high prices meant that a lot of the big wine producers disappeared. But we will get through, even if our co-operative has been forced to close the door to returning associates. Historically we've had much more difficult times."

Culturally, though, wine seems no longer to be a drink of mass consumption in Spain. "My clients are getting older and older. Maybe 80 per cent of them are over 45," says Fernandez Unica, the Granada bar owner. "All the young kids seem to want is beer and Diet Coke. How do you educate them about wine if even the cheapest top-range stuff costs €15 a bottle?"

Global warming has had an effect, too. The rise in temperatures has meant that for the first time vines can take root in villages such as Olot in the Pyrenean foothills. As a result, yet more wine has flooded on to the market. And quite how the Spanish will drain their wine lake of 3.4 billion litres and simultaneously repair an ailing flagship industry is far from being resolved.