Banker to the US Industry
Rob McMillan, ‘banker to the US wine industry’, launched the wine division of the Silicon Valley Bank’s wine division and became its managing director in 1991. Before that, he had received an MBA from the Santa Clara University Leavey Business School and worked at the bank of America. For the last 17 years, he has published an annual report on the US industry that is widely regarded as essential reading by producers and distributors. He is also a regular speaker at a broad range of events, and known for the frankness with which he expresses his views.
In a lengthy interview with Robert Joseph, editor at large of Meininger’s, McMillan made a number of key points.
Trading Up, But With Limits
Perhaps most crucially in the short term, is the move away from inexpensive wine. Sales of bottles retailing at under $11 (of the kind that would be exported from Europe, for example at €2.00-2.50) are seeing “double digit falls in sales”. A major reason for this, he believes is the competition it is facing from other beverages, especially among younger consumers who “who see beer and spirits as pure substitutes for wine”.
Demographic shifts will, however, also affect higher-price wine. “We will always have the wealthy so there should be a demand for wines that are rare and possess a strong brand. Today that wealth skews to the large boomer cohort. But as those older wine-loving consumers are replaced by younger consumers… [who are more open to alternative beverages] we should expect price pressure even on expensive bottles.”
Lost Image: Wine is no Longer the Clean and Healthy Option
Wine, he says “has lost the mantle of ‘better for you’ that was established for the boomer generation [born between 1946-65] during the 90s” Today’s ‘better for you’ entrants, he continues “make the mistake of defining their product as clean, pure, natural, etc., and comparing it with all other wine being made. The message implies that wine other than those self-appointed ‘better for you’ brands is bad for you.” At some point, he concludes, this will “backfire on the messengers.”
More Imports?
Commercially, while McMillan expects the three-tier-system to survive, he foresees change among the bigger wine businesses that control the US industry. Water shortages and labour costs may increase the shift to overseas-produced wine. “The US share of imported wine has already risen from 12%-40%” and “At the commodity end of the business, Chardonnay from the US, Australia, or Chile is all the same.”
Direct to Consumer
Given the challenges of profitably selling lower-price wine, however, McMillan also expects the wine corporations to shift more of their focus to spirits – and to selling their wine directly to consumers. This is already happening, as he points out.
“The strongest growth in DTC today comes from larger wine companies. They have the money to invest in systems, find efficiencies and improve customer engagement using analytics.”
Selling Up
Other trends that have caught the banker’s attention include a growth in the number of businesses that are being sold, partly as a result of ageing founders’ children not wanting to inherit the responsibility. “2021 was probably the most active year in M&A in the US wine business. 2022 should continue to see good transaction volume.”
War Damage?
In the short term, McMillan is hopeful that “so long as the [Russia-Ukraine] war doesn’t escalate” he doesn’t envisage a negative impact on world wine consumption. “In alcohol-consuming countries, demand for alcohol often increases during a war, unless the resources of a country are stretched from the conflict.”
Like all good bankers, however, Rob McMillan is looking far beyond the short term…
To enjoy the whole interview, including McMillan’s views on the pros and cons of Private Equity participation in the wine industry, and details of his own WineRAMP initiative aimed helping to combat the shift to other beverages, please go to Long Read: The US Wine Industry – A Banker’s View.
Find Meininger's analysis of Rob McMillan;s 2022 SVB Report HERE.
