2017 State of the Wine Industry – The Cliff Notes Version

Videocast and discussion of the findings from the release of the 2017 SVB Annual State of the Wine Industry Report, will start Wednesday January 18th at 9:30 am Pacific Time. [Click this link to signup and join the discussion]

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These excerpts are a taste of some highlights, points, and charts that Wine Industry Insight found of immediate interest. These only skim the surface of a very deep body of information which needs to be read in its entirety to grasp its full impact.

This link will take you to the full report (.pdf) which will offer context, loads of information, and some typical Rob McMillan humor to keep the data from being overwhelming.

 

All of the text below (except for subheads) are direct quotes excerpted from the report. Footnotes have been omitted. Charts are reproduced without changes.

 

 

Sales Growth

We predict a sales growth range of 10 to 14 percent for the premium wine segment in 2017, up from 9 to 13 percent in 2016. The confluence of better retail conditions in the economy, strong consumer demand and good supply will collide to deliver improving industry performance.

For the industry as whole, we believe that dollar sales will rise by 4 to 6 percent while volumes will increase 2 to 3 percent. The growth will be exclusively in premium wine, with volume and price drops below the $9 bottle price segment.

Pricing

With the median baby boomer rolling toward retirement while retaining wealth and the cash-strapped millennials growing in purchase influence:

• Under $9 bottled wines will continue to struggle.
• Price drops for glass format wines are to be expected.
• Wines sold between $12 and $25 will grow in demand, and limited price increases will be available.
• Wines sold between $35 and $75 will find price increases difficult without the U.S. economy demonstrating improved performance.
• High-end luxury wines with an established brand will have no problem retaining volume levels and taking small price increases.

Supply

Our guess for total harvest in California for 2017 is 3.95 million tons crushed, which is about 7 percent higher than the 3.7 million tons crushed in 2016.

 

Overall supply is balanced with shortages of high quality pinot noir and cabernet, but excesses are evident in certain non-core varietals and for grapes destined for lower-priced wine.

 

Demand

Per capita consumption faces crosscurrents with retiring wine-loyal baby boomers being replaced by less affluent millennials, who are ambivalent about their alcoholic beverage of choice. If economic conditions continue to improve in 2017, we will offset those currents, leading to slightly higher per capita consumption for another year.

 

Today millennials are beginning to affect the lower price range of premium sales. Their presence is most visible in the $8 to $11.99 red blend category, but they will gradually move away from blends and into varietal wines or imports as their incomes improve.

 

…[A]n interesting event took place in the middle of 2015:

 

The growth rate in the $3 to $5.99 price segment,which represents 44 percent of total volume, turned decidedly positive in July.

 

Fishing for clues, we discovered that the reversal in trend was due to the popularity and marketing of the 3-liter box and Tetra Pak format wines from Constellation, Delicato and Gallo. Without the large formats, the category would have remained negative in growth, but that did spur added volume sales.

 

 

Direct-to-consumer sales

Direct-to-consumer sales are now a large and critical part of a family winery’s revenue base.

 

While state laws vary — and some permitted state laws can only be described as arcane if not stealth protectionism — at this point wineries cannot legally ship to Alabama, Delaware, Kentucky, Mississippi, Oklahoma and Utah, with Utah and Kentucky retaining felony anti-shipping laws.

 

All We Are Saying Is Give Blends A Chance

We are seeing a sea change in premium wine. The young consumer is giving blends a chance, and from our view their palate maturation looks like a sequel to the baby boomers’ entrance to wine, which started with Bartles & Jaymes and then moved to white zinfandel and chardonnay before settling on merlot.

 

The millennial, in the same way, experienced the short moscato boom promoted by recognizable hip-hop stars such as Kanye West and Lil’ Kim.

 

While premium moscato still exists (see figure 8, page 20), like the post–wine cooler baby boomer, the post-moscato millennial is evolving to favor more-complex albeit lower-priced red blends and box wine.

 

Where they move next is anyone’s guess, but I suspect we will see growth in cabernet and foreign wines in the short term. Longer term, we should see some varietal, country or domestic region emerge from the blend fog to forge a new relationship with emerging U.S. consumers.

 

Harvest Yield vs Quality

Imported Wine

Foreign bottled wine makes up 35 percent of the U.S. market, but that share is slowing after a long growth march. I believe that bottled imported wine will start to take market share from domestic producers again. That conclusion is drawn from the following observations:

 

• Millennials drink beer and spirits as well as wine and are slowly gaining consumer share over wine-drinking baby boomers.
• Good-value bottled foreign wine is widely available for purchase in multiple chain retail outlets and grocery stores.
• Digital access and evolving direct-shipping laws make foreign wine as available as domestic wine for the first time in history.

 

Planted Acreage Changes

While total vineyard growth since 2001 has been up slightly less than 1 percent, a look beneath the surface shows a monumental change that’s been under way for 15 years (see figure 17).

 

The San Joaquin Valley, which has traditionally produced generic wine, has removed 45,000 acres from production; other regions that grow grapes destined for more premium production have grown by about 48,000 acres.

 

Moreover, in the smaller growing regions in Oregon and Washington, where essentially all production is premium, acreage is estimated to have grown by 66 percent and 18 percent, respectively, just since 2008, underscoring the rotation into premium and out of generic wine.

 

 

Winery Financial Performance

As we look at the financial position of wineries this past year, revenue growth through the nine months ended September 30, 2016, was about 10 percent, which is right in line with our 2016 predicted growth range of 9 to 13 percent (see figure 30). The data for nine months
aren’t seasonalized, and we should still see the impact of a strong October-November-December period.

 

Survey respondents estimate that average sales growth for the year will end at 11.9 percent, which is a very good report card given the headwinds. Improved sales are due to increased demand for premium wine overall, a growing proportion of direct-to-consumer sales, the
release of the well-regarded 2013 vintage and very minor price increases.