Silicon Valley Bank 2019 State of the Wine Industry: 7 Headwinds, 7 Tailwinds

2019 SVB State of the Wine Industry Report & Videocast will be held today, Wednesday, January 16, 2019 at 9:30 a.m. PT or 12:30 p.m. ET.

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The following are extracts from the 2019 State of the Wine Industry Report by Silicon Valley Bank

 

The grape supply and the economy are viewed as a greater part of their success, but consumer demand and labor elicit increasingly negative responses. In 2018, the Winery Owners’ Confidence Index5 dropped into negative territory for the first time since the index was created four years ago. With a good economy and sufficient consumer growth, you would think owners would have a cheerier outlook.

 

Most of the same circumstances that drove double-digit sales growth in the 1990s are in evidence today, so we could reasonably expect them to drive another round of industry growth. But instead of an uptrend in the business metrics, consolidated annual volume growth of wine consumption is close to becoming negative for the first time since the early 1990s, and that syncs with the owners’ feelings. What is different this time?

 

Seven headwinds

1. Baby boomers, who control 70 percent of US discretionary income and half of the net worth in the US, are moving into retirement and declining in both their numbers and per capita consumption.

 

2. Millennials aren’t yet embracing wine consumption as many had predicted. Damaged financial capacity is a major contributor, but cannabis legalization is another factor explaining their slow adoption of wine.

 

3. The cumulative impact of negative health messaging — absent offsetting promotion of the health benefits of moderate wine consumption — is negatively influencing consumption, particularly for the millennial consumer. 4. Wine imports and substitutes (such as craft beer and spirits) are an increasing threat for mindshare among emerging wine consumers.

 

5. Distributor consolidation and a lag in innovating alternative direct-to-consumer (DTC) strategies beyond the tasting room and club models are limiting DTC growth for family wineries. 6. Large retail brand owners are expanding private/white label offerings to control the supply chain, drive down costs and offer lower consumer prices. This strategy plays to the emerging frugal consumer and captures wine sales that would otherwise be filled by traditional wine companies.

 

7. Vineyard labor availability is limited, and the price for labor is increasing. Other issues facing the industry include the slight oversupply of grapes in California and the inability of wineries to take price increases against higher input costs. With price increases difficult against the backdrop of slowing sales growth, the trend and mantra of premiumization we’ve become used to is coming to an end.

 

With continuing distributor consolidation, the dominant competitive issue for the family winery remains — finding a sustainable path to sell to the consumer. That too is becoming more challenging with declining tasting room visitation in some regions.

Seven tailwinds

1. With a good 2018 US economy, Gen X and boomers are demonstrating spending resilience and still increasing their purchases of wine above the $9 bottle price. That created another year of record US wine sales in 2018.

 

2. Though the median millennial is 30 years old today, the population peaks in size at age 24, meaning there are growing numbers of young consumers advancing into their 30s, the age their alcohol beverage mix normally starts to include more wine.

 

3. The fine-wine-producing regions of Oregon and Washington remain on a strong double-digit growth path. 4. Producers with long-established brands and those with good distributor relationships continue to perform above their peers.

 

5. The number and diversity of retail concepts and locations selling wine continue to grow to record numbers. 6. The harvest of 2018 was of high quality in virtually all growing regions in the US, with the exception of Virginia,6 where hurricanes made for a disastrous season, and, to a lesser extent, New York,7 which also had heavy rain to contend with.

 

7. The business is developing both strategies and tactics around the DTC channel and continues to show sales growth through this path to the consumer. With a good 2018 in the books, it would be easy for winery owners to just keep doing what they do now, hoping the multitude of challenges creating the current retail sluggishness will be solved. This would include consumers finding more discretionary income, labor and migration issues becoming disentangled, and the emergence of digital platforms and strategies to unravel the many problems and opportunities in the DTC sales channel.