Is there a slowdown in US wine sales?

Alcohol is piling up in warehouses across the US, says Jeff Siegel. Does this mean wine isn’t selling – or is something else going on?

Photo by Mike Benna on Unsplash
Photo by Mike Benna on Unsplash

US wholesale alcohol inventories are at an all-time high, according to figures from the US Census Bureau. Is this just normal business, given the increasing cost of wine, beer and spirits in the US over the past 30 years, or is something going on that is more economically ominous for the wine business?

The latter, given several important caveats, could well be the case.

Is it the ratio?

“What you’re looking for, the most important thing, is the inventory-to-sales ratio,” says Tarek Abdallah PhD, an assistant professor of operations management at Northwestern University’s Kellogg School of Management in suburban Chicago. “And the inventory-to-sales ratio is also at a record high, and that could mean that inventories are building up and sales are slowing down.”

The ratios, says Dr Abdallah, are 1.35 compared to 1.33 during the last recession. In other words, he says, it’s taking longer for wine, beer and spirits to wend their way through the supply chain than it did during the last recession. There looks to be more alcohol in the supply chain than consumers are willing to buy. That could mean a continued, or even an increased slowing, in US wine sales. In fact, says Dr Abdallah, overall wholesaler inventory levels point to a recession even more than the alcohol inventory levels do; the former has an even more foreboding inventory-to-sales ratio.
The first caveat is the numbers include all alcohol sales and don’t break the figures down by category. So wine inventories could be fine, with beer and spirits inventory levels increasing significantly. 

Second, the Census Bureau only tracks dollar volume and not quantity. That’s something to be especially wary about, says Michael Davis, a senior lecturer at Southern Methodist University’s Cox School of Business in Dallas. The record inventory level could be nothing more than a side effect of premiumisation – in other words, there is the same amount of wine in warehouses, but since it costs more, the inventory value has increased. In addition, he says, for concerns about a recession to be justified, the high ratios must consistent and not just a monthly (or couple of months) blip.
Third, consider direct shipping. If consumers are buying more alcohol directly from producers, then wholesaler inventories would increase and the inventory-to-sales ratio would increase, but overall sales would not necessarily be worse.

Fourth, inventories could be high for reasons specific to the wholesalers queried in the survey. These could include stocking up ahead of the holiday season, buying to take advantage of market conditions such as lower prices or the rumoured tariff hike, or building inventory levels to increase the company’s value in merger negotiations.

Still, says statistician Suneal Chaudhary PhD, there is almost certainly something going on that is statistically significant. “Wholesalers in total are not increasing sales as fast as inventory, and there isn’t much difference between the wholesalers in total and the alcohol wholesalers,” he says. “From what I can see, the ratio has been high since 2012. And those high levels are a classic sign of a recession.”

About those caveats

The higher inventory levels fit with other numbers showing flat wine sales. The ratio has been high since at least 2010, and Dr Abdallah says the ratio between 2010 and 2014 was higher as the country came out of the recession. Since then, it has levelled off to the current, still high, ratio.

Direct shipping probably doesn’t account for the higher levels either, since it remains a single-digit percentage of US wine sales, and direct shipping of beer and spirits is illegal in most states. And unique wholesaler conditions aren’t likely to be big enough to make a difference either, Dr Abdallah says.
Finally, the other thing to consider is mark-ups: if margins are increasing, then the ratio would increase, too. But there is little evidence that margins for wine are increasing; if anything, from anecdotal evidence, they’re being squeezed.

One of the intriguing aspects of the numbers, says Dr Chaudhary, is that the inventory-to-sales ratio apparently started creeping up at about the same time that premiumisation became a key part of US wine sales. Which, he says, makes sense – that’s the definition of premiumisation. But his interpretation found that the higher ratio is not simply because there are more expensive products in warehouses, but because sales have flattened out since then. Prices have risen, so consumers have become more selective about what they buy.

Jeff Siegel

This article first appeared in Issue 5, 2019 of Meininger's Wine Business International magazine, available in print or online by subscription

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