Sunday, July 8, 2012

Is 7%-11% growth in US Fine Wine disappointing?



Up to the spring of 2010, I wasn't the most popular of prognosticators. Prior to the crash I started handing out predictions as I saw things, a housing bubble, large market corrections, etc. Strangely, after the first gloomy prediction my literary agent stopped getting any calls for book signings and speaking opportunities. “Call someone that's not a Debbie Downer.” I was a pariah, a leper, an outcast with the likability of an attorney from the WSWA. Then last year when I said we were at the beginning of another long-term period of growth in fine wine, the phone stared to ring. I was once again quotable and in demand for speaking engagements. What’s the old saying? Failure is an orphan, but success has many fathers? That's why it's particularly disappointing for me to throw a little cold water on the wine recovery.... but let me emphasize the adjective 'little' because its a measured mid-year course correction, doesn't change the growth forecast, and I still want to get some speaking invitations.

This past spring in the Annual State of the Industry Report, we said we expected positive YOY growth in fine wine sales ranging between 7%-11%, which represented growth but a declining growth rate. In essence, though the year was starting out warm, we believed the summer would cool off. The reason?
  1. We didn't believe the growth off the bottom in restaurant sales would continue.
  2. The EU was an evolving problem we believed would get worse and impact the US
  3. We thought the US Dollar would strengthen slowing our own exports and increasing imports
Half way through the year, the forecast appears to be pretty good. While we started the year with an annual growth rate in the 13% range, through the end of April the growth rate for $20+ wines according to Nielsen had dropped to 11.1% for 52 weeks, and only 7.6% for the 4 weeks at period end. Its growth, but the growth rate is slowing. It's slowing because of the things we point out above, but also because of uncertainty in financial markets with the fiscal cliff entering discussions and a general disbelief Congress will act in a reasoned and timely manner.

Some of the major things I'm looking at right now: ECRI has been a very reliable predictor of recessions in the past. More recently, I've thought that index a little over built on homes data, causing a less than reliable accounting. Their founder Lakshman Achuthan though has been relentless - albeit slipping on the timing - in predicting a second recession in the US. A look at the ECRI Weekly Leading Indicators shows that same trend we talked about in this year's Annual State of the Industry Report; improvement in the early part of the year continuing the growth off 2011, but a slowing later in the year.

The second indicator I'm watching is the Unemployment Rate. Last Friday, the new payroll report came out and just like April and May, June was disappointing. We've gone five months straight with declining growth in job creation. Economists were predicting an anemic 100,000 jobs created for June but only 80,000 jobs were reported and that sent the Dow tumbling at the end of the week. Job growth would be helped with improving retail sales but retail sales numbers have been slipping too as of late. Chairman Bernanke hasn't been particularly positive about the prospects for the remainder of the year either. While many think the FED is out of options, the commentary from the Chairman consistently takes the opposite view as one would expect: "We will do whatever we need to do ...." yada-yada.

The third thing I'm watching right along with the rest of the world is the action in the EU. Last Thursday the ECB cut its benchmark lending rate by a 1/4 point to a record low 0.75 percent, and then reduced the rate it pays on overnight deposits to zero. That is a clear sign of weakness ... as if we needed a sign for that. The ECB now like the FED has almost exhausted the range of typical solutions it can deploy. Some anticipate another cut in the main interest rate to 0.5 percent but after that options are more limited and there isn't any unity in the EU satellite countries as to what if anything would next be done. Limited options might include the ECB buying satellite country bonds or offering more debt to the already weak state participants thus exposing the ECB to higher levels of country level defaults like Greece. The forecast we made about the weakening Euro appears to have been a good call and I would expect with these rate cuts, we will see more weakening in the months ahead versus the US$, particularly if Congress finds the will to act.

What about Asia and rest of the world? Aren't emerging countries seeing growth still? Yes they are. But really like the rest of the world, those economies are slowing in their growth rates as well. A look at the chart on the left shows the world has in fact fallen into a contraction phase with even China reporting declines in their growth rates in manufacturing.

Hey .... take that knife out of your hands and move it away from your wrists. I know its not very encouraging, but there are some positive things going on and that will help the wine business.

First is the housing situation in the US: While there is no good solution being discussed to improve the availability of mortgages, home prices have bottomed, months of existing home inventory is at a reasonable place (six months), and both long and short term interest rates remain low for consumers. The second positive thing is gas prices which were hovering around $4.00 a gallon when we wrote the State of the Industry Report, have since dropped consistent with world wide inventory excess (and activity slowdown). And perhaps the most important thing that is positive particularly for the wine business is the continuing slow positive healing in the middle-class consumer. The ride is a bumpy one, but progress is being made and that middle-class is so enormous in its impact, any improvement can have a dynamic change in a small industry like the wine business.

Last bit of good news I'll leave you with: Wine acts more like a necessity. Its not a "nice to have." Its a "need to have." So despite the slowing in the growth rates we are seeing in wine and the world economy, there is growth. Further, I believe (against my better judgement) that Congress will avoid kicking the US economy off the fiscal cliff at year end. And last, here is where the social part of economics comes into play - the US consumer is tired of hearing about doom and gloom. Just like movies where the recession weary flock to get an emotional break from reality, wine can play the same role. People can stop, enjoy a bottle of wine with friends and forget about all the disappointing things I mention above, and then shut off gloomy prognosticators like me.

Bottom line, I am reaffirming the 7%-11% growth rate in fine wine we predicted in the spring. The forecast seems spot on still. I believe the year will continue to play out with lackluster US economic improvement (underscore improvement though), continuing pain from the EU and more weakening in the Euro versus the US$. Against my better judgement, I believe Congress will act to kick the can down the road before sending us off a fiscal cliff. I expect only marginal upside pricing power for the rest of the year for producers, based more on a short supply than a healthy consumer and stronger growth in under $20 wines compared to the present. With a decline in the rate of sales growth though .... what about next year? Will it start off slower than this year? That is going to have to wait for next year's State of the Industry Report.

I might not be the most optimistic at this point, but I'm hardly a Debbie Downer either. I think I will still get some good speaking invites the rest of the year.... at least I hope?

Feel free to comment and poke holes in my thinking, and share your thoughts on what you are seeing in the wine business.

4 comments:

  1. Rob...love the shot of you & Diamond Head (lived in Honolulu for 7 years).

    Great commentary on the world economic situation. As you seem to be writing this more for the consumer I would say that they have something special to look forward to...wine consumption in Europe is down and many producers from there are looking for opportunities..the weakening Euro will make many of their wines less expensive and should provide new opportunities for consumers to enjoy price-friendly non-American wines.

    For those who work for American wineries and are reading this I would add a "look out"...many of these people are pulling out all the stops (i.e. when they can't find importers they are forming their own import businesses). There is upward price pressure even though early reports are for an excellent yield in this year's harvest..the spot market and bulk juice is causing changes as many of us have read elsewhere..it will be an interesting 4th quarter...better dusk off your best business plan for maintaining market share and get to work.

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  2. Thanks for the comments Mark. Stay tuned for the Sunday release of the SVBonWine blog where I talk about the harvest and Q4 expectations.

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  3. Are we going to have a shortage of grapes domestically? Will we be importing more wine from Spain, Italy, and Portugal if retaliation breaks out between France and California over Foie Gras and Wine?
    Whose ox is gored worse?

    @VineBuzz

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  4. Rich -
    Thanks for the comments. We are importing more foreign wine already, up substantially according to Gomberg Fredrikson, but not bottled wines. The increase is from imported bulk wines that go into lower priced domestic and foreign labels. Foie Gras? Can't see how that will impact anything except limiting my choice of food in a nice restaurant.

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