How Much Did Wineries Really Make in 2018?

      The Wine Industry Shares Most Information

Unlike most of the business world, there's a sense in the wine business that sharing is part of community, and your neighbor is part of your support mechanism. They are not a rival nor are they a competitor. Everyone freely offers support in the form of information and time. If you need a tractor because yours is mired in a soggy field, no problemo! Need a little welding and custom fabrication on a pump? I'll be right over with a welding rig. Stuck fermentation? I'll send over a portable heating unit.

Wine Consumption Probably Won't Return to "Normal"

      I Seek The Finest Knights in the Land

We work in the most interesting and wonderful industry on earth. Two things I love about the industry are the infinite palate of interesting souls and the sheer volume of optimists within it. Ours is a happy place; a Camelot of sorts. It's an industry where losing an arm is viewed as just a scratch in some corners of the realm.

I love to be an optimist and predict safe and clear travels when the facts support it. But sometimes a foe might be blocking our path, and we need to take up arms. 

Several years ago when I authored the Annual SVB Wine report, I was quite optimistic and outlined all of the positive influences filling our sails. But this past year I was more gloomy; a Black Knight, and that bothered some of the optimists around me.

Optimism is good but blind optimism, the kind that denies the loss of both arms when they lie on the ground ... that isn't so good. Blind optimism is a poison that keeps us from taking a critical view of important trends and keeps us from committing to timely solutions. 

For my friends who just don't want to hear any of the gloomy facts below (along with some accompanying solutions), we'll call it a draw. You can stop reading and enjoy the next video instead. 

Now Back to reality...

Well then ... according to the BLS Consumer Expenditure Survey, Americans spend about 1% of income on alcohol, no matter the age. One could impute from that statement, we just need to wait until millennials are older and they will spend their 1%. In fact, just waiting is indeed the suggestion I often get from optimists. 

That's a rational view because the millennial generation's median age is 30, and boomers didn't really hit wine hard until their median age was 35. But that statement - spending one percent, is about total alcohol spending, not wine, and young consumers aren't treating wine as kindly as craft spirits and beer these days.

In the State of the Industry Report, we noted that millennials haven't increased their share of premium wine purchasing in four years. They just aren't engaging with wine yet, except on special occasions. But they are drinking craft beer and craft spirits more often.

As it relates to alcohol, there is another trend that bears watching. As the nearby slides show, again from BLS data, the under 25 age group in red is spending less and less of their hard earned income on any kind of alcohol! That means they are spending it elsewhere.

In the first slide, we can see the percentage of their total income that the group is spending as a declining percentage. In the second slide, we see that they are spending a declining amount of per capita income on alcohol as well. And again, that's an overall statement on alcohol, not just wine alone.

     No Amount of Wine is Good For You

The section title is now a line that's being repeated from politicians across the world and stems from a controversial study. It doesn't matter if it's true. That's what's in the narrative.

The young consumer is being frightened away from beverage alcohol by the hijacking of science and the continuing onslaught of negative press coming from anti-alcohol groups. We covered that in the State of the Industry Report as well and noted the increasing volume and outlandish claims coming from that group. 

Today there is a growing trend toward wellness and that includes abstinence from any form of alcohol. Without any kind of response from the wine community to reference science that shows moderate wine consumption is healthy, we will see the negative trends continue.

We know that the growth of premium wine sales is slowing and total volume growth of wine has turned negative; something else we pointed out in the Annual Wine Report. Off-premise growth is displayed in the graph near this text. Wine is being hurt by the combination of the boomer moving to retirement and the young consumer's current lack of engagement. That's changing wine demand from what we've grown accustomed during the past 20 years of premiumization.

So the question at hand is, with the negative trends we are watching, will wine consumption ever return to our view of "normal?"

You won't like my answer, but don't be surprised if young consumers drink less alcohol tomorrow, and those who do drink continue to embrace craft spirits and beer instead of wine. 

If that statement isn't too gloomy, then you are an open-minded realist and undoubtedly quite attractive as well, so I encourage you to read on.

      Four Reasons Millennials Are Not Good Wine Consumers 

1. Wine is expensive compared to craft beer and spirits. One 750ml bottle of a well-known pinot noir costs $30 and has 5 servings that have to be consumed that evening or it will oxidize. The same size bottle of Makers Mark bourbon can be found for the same price, has 25 servings and will stay drinkable for months. Another way to look at it: Jon Moramarco computes that on average, wine is $2.15 per five-ounce glass serving, versus $1.28 for a bottle of beer and 0.93 cents per shot of spirits.  Premium spirits are a better value compared to wine - and bartenders know that they get better margins for spirits over premium wine too.  Our frugal millennial consumer knows wine is comparatively more expensive.
2. Millennials are more health conscious than prior generations. The wine business is being out-marketed by spirits producers who tout health-related features of their products such as low calories, no added sugar, gluten-free, non-GMO, organic, sustainable, etc. Wine? We don't yet put calories on our labels, we stopped promoting the massive body of science showing the health benefits of moderate wine consumption and with the anti-alcohol movement gaining traction in the narrative, even alternative non-alcoholic and engineered alcoholic products are starting to gain favor. The industry reaction? Some wineries are trying to adapt by making non-alc products, and many are trying to find a way to move into cannabis. Our health conscious millennial consumer is moving away from alcohol as a category.
3. Millennials might not collect wine as did their boomer parents. Millennials are renting more than past generations at a similar time in life, and by all indications aren't expected to have the same degree of home ownership in life. But when they do buy homes, they look for more compact spaces. A premium liquor bar takes up less room than a wine cellar but still supports a family who entertains. Our space-starved millennial consumers probably won't collect wine like their parents.
4. When premium wine took off in 1994, there was no craft beer or craft spirit option. Wine became the choice for boomers because it was the only truly premium product, and I might add, it was a better value in 1994. Today, the typical beverage alcohol consumer drinks across categories - beer, wine, and spirits. Only 7% identify as pure wine consumers today. Our practical millennial consumers are weighing their premium bang for their buck and are finding wine wanting compared to spirits in particular.

Today the landscape is different from the 1990s when boomers drove wine consumption higher. Craft spirits and craft beer are pure substitutes for wine now and both are increasingly paired with meals as the millennials repurpose the use of spirits and craft beer to align with their tastes and budgets. Add to that "gullet-share" losses from non-alcoholic beverages and factor in a future with CBD infused wellness drinks, and there is less room for wine tomorrow - unless we change the game we're playing.

      Wine Drinking Grows with Age. Just be Patient ...

There is no question that beer and spirits have been the entry point into alcohol beverage as long as most of us remember. And the pattern we're comfortable reciting is that all consumers evolve to wine as they age. That's what the chart nearby is saying about the current state. But consumers haven't always moved from beer and spirits into wine due to age. 

The Mature Generation - the people coming back from WWII as portrayed in Mad Men were beer and spirits drinkers. 

Coming from Prohibition and the Great Recession, the Matures largely bought alcohol beverage with a practical approach of ethanol per dollar - bang for your buck. Wine didn't compete well in that equation because it was lower alcohol and traditionally sold in smaller formats. To compete with spirits, wine became fortified in the '50s or sold in gallon jugs that were mass-produced in order to drive the cost of production down so the price could be dropped and the producer still cover a profit margin.

That approach worked in the fringes of the adult population in the 50s and 60s, but never really got that generation engaged with wine as their first choice. 

The mature cohort remained more beer and spirits consumers throughout much of their consuming lives. Their rotation to wine started only when the wine industry gave compelling reasons to evolve from beer and spirits. It wasn't age. It was producing a product, marketing and then selling wine that produced that change. And those consumers were in their 60s and 70s at that point.

The popularization of wine and move from beer and spirits really happened in the 90s with boomers who broke away from their parent's traditions and moved to premium wine after starting in cheap spirits and beer. The lesson is that offspring don't always follow the path of their parents.

To be successful, we need to give the young consumer more compelling reasons to be wine consumers. Hoping they will grow into wine isn't a good choice. As I say often, "Hope is not a strategy."

If we don't evolve the way we sell and market wine, we very well might suffer the same result the Mature generation took, and see young consumers staying with spirits and beer as their preferred choice for beverage alcohol. But there are things we can do to avoid that outcome.

     What's are some Solutions to the Gloomy Trends?

For wine producers, I don't believe scurrying off to non-alcohol and cannabis-infused drinks as some are doing, or coming up with the next pink RTD wine cocktail are the right approaches. We should stay focused on our strengths. But we need an on-ramp for the new consumer which means we have to evolve our marketing. 

We have to find the price, product, packaging, promotion, experience, quality and any other "P" we can think of, and begin engaging with the young consumer now. We can't "wait until they can afford wine" because the rest of the beverage alcohol industry is already changing their games to take advantage of the current trends. We are being out-flanked and the game is time sensitive.

The first and easiest thing to do is to beg our Marketing, AVA, and Industry Associations to keep the valid moderate-consumption research at their fingertips and/or fund positions that give credible journalists and law-makers the other side of the anti-alcohol stories that are flooding the press. 

The Wine Institute used to have a full-time technical position that did just that, but the position within has been vacant for more than a decade. It ended when wine consumption started to soar and the message of health was embedded into the narrative. I've asked several in the Board of Directors to consider that and I know I've been heard, but we should all ask that the position be reinstituted and be willing to pay for it. And we should all look to other industry associations to do the same.

The second thing we need to do is evolve the way we talk about wine. This is the first time in American retail history that there are two very large cohorts at opposite ends of their buying lives - and each has different values and financial capacity. The categories doing the best in retail today are those who figure out how to increase demand from both cohorts.

I appreciate the spirit of those who say "we need to stop making wine so complex," but I disagree because the dominant buyers of wine are still people who have appreciated the way wine has been marketed. We have to keep the older consumers and market the way they prefer BUT AT THE SAME TIME, adapt to the new consumer, giving them products and the positioning that appeals to them. That's not easy, but we aren't really trying. The spirits industry is trying, and they have the best growth rates in all of beverage alcohol. 

While wellness is a trend, inauthentic wellness claims will, in the end, backfire as snake oil. We're starting to see some of that with the recent LeCroix litigation which has cut their stock value in half.  But of all the alc. beverage categories, wine is unique. It's about as simple as it could be. It has the best science around health. It is often grown from sustainable or biodynamic farming. If we put the ingredients on the back of a bottle it would say something like, 'this wine is made from sustainably grown winegrapes with small amounts of naturally occurring and added sulfites. Nothing else.' 

Optimistically speaking, I believe the wine industry always has responded to a challenge when it's made clear. I believe we have the opportunity to recast the way we sell and market wine and see double-digit growth rates again. We may indeed see wine sales return to what we are used to if we take action ... Or did you stop at the Sesame Street Video?

What's Your Opinion?

• Should we just wait another five years and hope the millennial will move to wine? 
• What are you doing to evolve your marketing (all the "Ps")?
• How are you retaining the best of your message for the existing customers, and still engaging with the newer consumer?
• Will you do your part and ask your Industry Associations to please get technical people in place who can respond to journalists and legislators seeking the other side of the story?

Please join this site on the top right-hand side of the page, and offer your thoughts below. I respond to everyone.



Please share this post on your favorite social media platform. We need to heighten the discussion of this topic.

Sincerely,
Rob "Doom & Gloom" McMillan

Mid-Year State of the Wine Industry Video Update

In early May, I was interviewed by Latife Hayson on the 2019 State of the Industry Report from Napa California. The interview format allowed me to wander into many other topics and updates not covered in the original SVB Wine Report , the January panels presenting the SVB State of the Industry Videocast nor the Followup Q&A Videocast. 

I was able to take large subjects in a quick-hit format which I really enjoy. It also gave me a little time to talk about the marketing opportunities we have in the family wine community that can effectively increase sales.

Annual SVB/WBM Direct Consumer Sales Videocast

      Lots of Shades and Few Patterns

When I wrote the business plan for Silicon Valley Bank's entrance to the wine industry in 1992, I did so largely from a researchers perspective, as I had only modest prior industry experience, and by the time I authored the plan, the industry had completely changed.

I discovered in the process that there were conflicting industry opinions from many of the experts and little research available to support those opinions. The research that was being done was being created by researchers in Chicago and New York; far from wine country. There was almost almost zero street-level intelligence, with the exception of the work done by Motto Kryla and Fisher and Gomberg, Fredrikson & Associates.

As an analyst back then, deciphering the wine business was like trying to see patterns in the lead picture: Plenty of pop and thousands of brands, all trying to find their way in a crowded landscape. Every winery's nozzle was aimed in different directions - region, varietal, wine style, consumer, path to market, consumer segment - because strategy was too often supported by guess work.

That induced me to research and produce my own information for our customers - and the wine community as a whole. The upcoming videocast: Insights for Successful Consumer Wine sales is one such example. --> [signup here] <-- 

      What's the Greatest Risk Today?

The wine business is far more complex than people think. It's a maze of complexities with different models, varying paths to the consumer, pressure from federal, local, and state regulations, a lack of good information, controlling power in a small numbers of hands and changing consumer demand. Oftentime decisions are made with the love of the product in mind, versus a business decision being made with financial returns in mind.

Perhaps the greatest risk we should all be most worried about is our tendency to continue on on a path that's successful. If it works, we keep riding the trend as far as we can, until the strategy fails. In an industry that takes 5 years to get a fully mature yield, shouldn't we be making decisions with a view to meeting the future instead of reacting to the present? Where will things be in 5 years? I guarantee the industry 5 years from now will look very different than it does right now, so the strategies that are starting to wobble today, will be on life support five years from today.

With that in mind and the new SVB DtC Survey now complete, there are many things we'd like to bring out and discuss, including current insights from the survey as well as marketing solutions to consider. This is a time where we need people to grasp the issues, and participate in the evolution of the business and consumer. Getting out ahead of this evolution is where you will find opportunity for growth. 

      Understanding is the Beginning of Change

What are some of the changes we are seeing in this year's survey?

There are more tasting rooms being opened today versus wineries, as a result of the shift to direct to consumer sales, but since 2013, there are fewer of both being opened.

Tasting fees which have been increasing for years are now leveling off; a sign that tasting fees have reached the point where they may be discouraging good/new customers.

After years of seeing increases in by-appointment tastings, the percentage of pure by-appointment has dropped in favor of a mixed model, accepting both walk-in and those with appointments, with respondents suggesting the mix of tastings is also going more of a blend of formal and casual, reflecting consumers with split preferences - some preferring casual and others formal.

  Live Direct to Consumer Videocast

I hope that's enough of a teaser to get you to sign up for the annual SVB/Wine Business Monthly Live Videocast, where we will offer more dialogue on many new findings, along with a lively discussion of solutions and strategy.

In addition to myself and Cyril Penn, included as new guests this year are Tammy Boatright; a person with more than 20 years in direct marketing and winery management and Lisa Kislak with decades of experience in white table cloth restaurants applying data to drive marketing decisions.

Please [register] for this year's live telecast which will take place May 22nd at 9:30 Pacific Time. Joining live gets you into the chat room where you can ask questions of the panel, and discuss with wine people from across the globe. 

Even if you can't make this time, registering will get you the link to the videocast replay when that's available.

This year's panel will include:

        Tammy Boatright - President, VingDirect

        Lisa Kislak - Chief Marketing Officer of Crimson Wine Group

        Cyril Penn, Editor in Chief, Wine Business Monthly.

Date:   May 22nd, 2019

Time:  9:30 am - 10:30 AM Pacific Time

I Can't Take the Lunacy!

This might be the shortest blog I've ever penned, but I've got to get this off my chest.

In the 2019 SVB State of the Industry Report I pointed out some changes we as a wine industry are facing, including the lack of engagement by our younger consumers which I attribute in part to the cumulative negative health messaging coming from neo-prohibitionists.

Annual Direct to Consumer Survey Closes this Week

Every year SVB and Wine Business Monthly collaborate on a survey that maps out the changes in direct to consumer wine sales - providing benchmarks to respondents that are invaluable in day to day business, and equally important as we chart new paths and channels to sell wine.

The 2019 survey closes this week. Join the hundreds and hundreds of wineries who have already taken the survey this year [Take the Survey]

Take the above chart for instance which was a product of last year's survey. In it, we can see that for the first time, there are more tasting rooms being built than wineries. Why? Because wineries all believe they need a tasting room to sell direct. But is that true? The answer is that not all tasting rooms are necessary, but client experience is necessary even if there isn't a tasting room

The SVB Annual Direct to Consumer Survey is Open

Today more than ever, the wine industry needs to be more strategic and proactive in their direct to consumer strategy and execution. The business is rapidly changing and will over the next five years cause whiplash for those not buckled in.

Improving and evolving direct sales strategies will be the difference between success and failure in the coming decade as the industry's consumer evolves under our feet, anti-alcohol groups continue to push their agenda, and competition from beer, spirits and foreign wine intensifies.

How do I know that? It seems a little grandiose to make those kinds of statements. If I were you, those are the types of statements I'd ignore as hyperbole and click-bait. Blah-blah-blah. But am I just running off at the mouth for effect?

      The Real Deal

Those who follow this blog know that I extensively research the industry annually and provide the findings in the SVB State of the Industry Report in January. This time of year, I dig in to the direct to consumer segment as Silicon Valley Bank and Wine Business Monthly collaborate on an annual nationwide survey, targeting direct to consumer wine sales. All this is done on a gratis basis to help the industry make decisions.

This effort is so important to industry success, that every major industry association on the West Coast and many others from around the country actively support the project.

Last year, we had about 10% of the industry complete the survey, providing a statistically significant sample by bottle price, years in business, location, and case size. (Top chart by case.)

The survey is opens as of now, and it will close on March 22nd, at which point SVB will contribute substantial time and resources to analyze the data, turning it into relevant information for the wine community. If you are thinking about participating, you should also ask, "How will it be used?"

In May, all respondents who complete the survey receive high-level analysis, benchmarks and the complete sanitized respondent data, anonymised of all personal and business identifying information. In June we will then broadcast a live videocast to the industry to go over the new findings. Last year's videocast is below if you are interested.

In April, Wine Business Monthly takes the findings SVB produces and puts together their own view, publishing their conclusions in the July issue (2017 WBM Tasting Room Edition - PDF). The effort is always substantial, but the rewards for wineries in benchmarking and understanding the current landscape has been priceless. 

This year the survey has approximately 30 questions and should take you no longer than 15 minutes to complete and even less if you are a little prepared. If you would like to see the questions in advance, you can download and print them here.

Are you ready to participate in the survey this year?

Please promote this post in your favorite social media platform, or even better - please forward the link to your winery colleagues and ask them to participate.

If you would like your AVA to participate, we will also send them free Regional Benchmarks for their own use, presuming we have a statistically significant sample size and an address to send the information.