Wine sales figures for the first half of 2019 show that the premiumisation trend in the US has begun to head south. The question every wine producer should be asking themselves is: “So what do we do now?”
Californian wineries are thinking about premiumization, higher revenues, and greater profitability – and what better way to demonstrate the focus on premiumisation than by pushing up prices? However, the argument against such a push needs to be considered. Should wine producers chase short-term profit by pushing prices higher – or is it time to focus on creating more wine consumers for long-term business growth?
Wine producers might think customers will support price increases in the next 12 months; however, there is already ample evidence that recent price increases are dissuading consumers from choosing wine as their beverage of choice. Further price rises are only likely to exacerbate that trend.
If prices continue to go higher, it could result in an oversupply of high-priced wines fighting for an ever smaller market. There is already a surplus of wine inventory in upper price brackets; more than 50% of wine producers in the US do not even have a distributor. Many of these producers have years of supply back-logged in cellars and are looking for new ways to sell in an increasingly competitive market. Such a situation requires an influx of new customers, coupled with renewed interest from existing customers in order to help clear these inventories.
This emerging US market trend echoes what happened in Europe in the 1980s. The impact on that region’s wine sector was disastrous for most producers, as wine consumption plummeted from the 1970s through to at least the second decade of the 21st Century. The cardinal European error was focusing on quality improvements and ignoring the customer. Instead of giving wine consumers what they might want, the wine sector focused on producing what it wanted to produce. The US wine sector now stands at the same precipice, facing an identical decision on its future.
The French case
Taking the French wine sector as a example of how not to respond to a similar market situation is a useful starting point. According to France Agrimer, by 2015, wine consumption per capita had fallen more than 50% from its 1960s peak of more than 100 L per annum. As consumption plummeted, France saw quality increases as the long-term saviour for the sector.
Regional wine appellations (known in France as AOCs) were identified as a common solution. At the same time, the volume of AOC wines consumed by the French went from around 10% in 1960, up to 52% in 2015. Some of these regions were able to sell wine at higher prices, yet the majority of wine producers suffered declining sales and plummeting profitability, as shown in the following graph:
In other words, France, on seeing that consumption of one of its most valuable agricultural products was declining, decided the best course of action was to focus on pushing regional diversity and quality improvements as the sector-wide, long-term solution. The highest quality producers benefited—but new wine consumers don’t begin drinking wine from the top end of the market. So while existing wine consumers enjoyed the benefit of an increased diversity of choice, the French wine sector overlooked the need to attract new consumers into the category.
These quality improvements also required investment in regulatory structures, viticultural practices, winemaking technology, and distribution advances, all of which resulted in an across-the-board increase in the costs of supply, while demand was falling. Even a first-year economics student would see that such a strategy was doomed to fail.
France’s failure to recognize that a premiumization focus would lead to a stagnation of its customer base is the reason why today almost 80% of wine consumed in France is by 55+ year-olds. Although France is indisputably one of the leading, quality wine-producing countries in the world, its future doesn’t seem promising without a plan for attracting new consumers to its wines.
A warning for the USA
That a parallel situation is now occurring in the US that should be of concern. There’s a poignant historical irony in the fact that just as French interest in wine began tanking in the 1980s, the US wine sector began implementing a version of that same French industry model, in echoing the practice of designating regionally specific, viticultural areas. In fact, the Augusta AVA became the first-ever recognized viticultural area in the US in 1980, and there have been a further 242 AVAs added to the register as of October 2019.
While the US adopts more AVAs, wine consumption stagnates, yet the focus on premiumization continues to grow. The similarities with what happened in France suggest that we might be witnessing the French case recurring in the US.
European wine market history shows that failing to recruit new wine consumers is the last thing the US wine sector should be doing right now. As the number of wine consumers in the US has stalled in recent years, the local wine sector should avoid profiteering in favour of new market investment. Here is where the US wine sector’s global leadership in business practices can come to the fore.
Europe ignored a decline in domestic consumers in the 1970s and ended up losing generations of wine consumers in its pursuit of quality-driven premiumization. The US wine market has an advantage in that its business culture has a customer focus. With a plethora of wine club subscription models, a focus on ‘direct to consumer’ distribution, and a level of service that exceeds that offered in almost any other wine-producing country, there’s a framework in place to invest time and attention on new consumers. However, with the local wine sector showing a desire to follow in Europe’s footsteps, there is a real risk that the focus on pushing pricing upwards will only end in the market’s downward spiral.
Professor Damien Wilson is the Hamel Family Chair of Wine Business Education at Sonoma State University
Graph created by Reka Haros.
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