“Winter is coming.” That’s the message that Paul Mabray, CEO of data company Emetry, has said every time he has stepped onto a conference stage in the past couple of years.
The Silicon Valley Bank State of the Wine Industry Report 2020 has just dropped and it appears that, yes, winter is on its way for the US wine industry.
“We are at a point of oversupply in the business cycle,” the report begins. Although the US wine industry has never made better wine, “making great wine isn’t good enough for the consumer today. We are increasingly missing the mark on consumer expectations, and our results show it.”
Yet, paradoxically, the report says that 2019 “was a pretty good year despite the challenges, with almost a quarter of the industry reporting that 2019 was their best year in history!”
The mixed result is a sign the US is splitting into winners and losers. “More wineries are reporting great performance or record years, and at the same time, an increasing number of wineries are reporting poor results.”
At a time when wineries across the world need to develop better marketing and direct-to-consumer strategies to sell more wine, what’s going on in the US market could have lessons for everybody.
The SVB report is compiled by Rob McMillan, executive vice president and founder of the bank’s wine division, and its release is an annual event. For McMillan, it’s something of a labour of love, as it takes up to three months to compile and is released for free. The report almost died in 2020, as fewer wineries completed the survey than in the past; McMillan had to do a last-minute plea on social media to get enough data to go ahead; however, wineries rallied and the report has appeared once more, though it may be for the last time.
If so, it will be going out on a much more sombre note that when it began nearly two decades ago.
“The past 25 years was an era where the rising tide of consumer demand lifted the boats of everyone in the wine industry,” wrote McMillan. “But as we evolve into this new era where the tide is slacking or receding, all boats won’t float, and we will have winners and losers.”
The big takeaways
The US supply chain is full, because the historic 2018 vintage kept tanks filled into 2019. Although the 2019 harvest was lower, it wasn’t low enough to correct the supply problem. Wineries have also overestimated sales growth, “leading to an inventory bubble”, that may take several years to clear.
The report is blunt: “Unless we focus on boosting consumer demand, we have too many acres of grapes planted today in California, and some will need to be removed, mothballed or replanted early in almost every growing region in California.”
Washington is also oversupplied, while “Oregon will remain a bright spot for the industry”.
The oversupply has come at a time when there is a decline in total sales volume and a difficulty in passing price increases on to consumers. While baby boomers are still buying wine at all price points, both their spending and alcohol consumption is slowing as they age. Generation X are buying wine, but are a smaller group, while the Millennials “aren’t engaging with wine as hoped. They have a current preference for premium spirits and craft beers”.
Things don’t look much better in the on-trade, as “total industry dollar-denominated sales have landed in a flattening period… That trend in volume declines continued to accelerate through 2019.”
There is some good news – “premium wine” (priced between $9 and $19.99) delivered the same total sales on-premise as the entire $9 and below category. The segment is growing and there are more places to put it, with chains like Starbucks and movie theatres now selling alcohol.
“Newer entrants, discounters and private labellers with their own brands are showing good growth in the prices range,” says the report. “This is a segment where we could see some modest positive changes in 2020 if marketing dollars are put toward wine by the large wine companies.”
It’s in the luxury category that the two-speed nature of the wine industry really shows itself, and McMillan expects the performance gap to widen in the next five years. Those wineries that are doing well in this segment include: “wineries with strong brands that have wholesale representation, true cult wineries still able to sell using an allocation approach, business with professional and experienced management teams, those with a proven strategy that is pulling in younger consumers and keeping the older ones,” and those who focus on the customer experience.
To stay profitable, wineries need strong management, and an understanding of marketing, branding and metrics. The customer experience must also move beyond the tasting room, because “the rate of growth in the important tasting room and club channel is also showing fatigue”. And younger consumers, who are looking for transparency and authenticity, must be taken seriously.
“We have been too slow in adapting to this consumer change,” writes McMillan. “We aren’t yet effectively marketing to young consumers and creating resonance with their values. We aren’t doing a good enough job of giving them a reason to buy wine.”
The report expresses particular alarm at the pressure being brought to bear by the health lobby. “The cumulative weight of the world messaging and anti-alcohol studies has been effective and has once again emboldened US regulators to promote additional restrictive regulations on alcohol consumption,” it says and goes on to recommend that “we need coordinated industry leadership to bring balance to the conversation”.
What the report doesn’t cover, of course, is the possibility that the US government may impose 100% tariffs on wines from the EU, a calamity that would accelerate the weaknesses that are already showing their face in the US wine market. Given that the US market is now the biggest in the world by value, any weakening of consumer demand will have a major impact on the world’s wine market.
It’s time to rug up for winter.
The report can be downloaded here.