Sunday, September 9, 2012

2012-2013 Predictions on the Wine Business

Each year I take out my crystal ball, put on funny clothes and after my eyes roll into the back of my head for a sufficient amount of time, write Silicon Valley Bank’s State of the Wine Industry Report and make some predictions. I am a most fortunate soothsayer to be able to see so much of what is largely a private industry. Silicon Valley Bank has it's own data base of financial information, I produce various surveys throughout the year with more than 500 respondents, have direct contact with clients, prospects, suppliers to the wine business, relationships with distributors and large scale farmers, academia, media and I’m sure I’m missing an angle or two. That all helps to clear up the cloudy crystal ball.
One observation we made in the spring was the wine business is going through a rapid evolution. Our prediction was the change would soon place the function of selling wine on par in importance with managing costs, especially grape, bulk wine and production costs. Why that prediction? With grapes trending to shortage, the wineries who have better cost controls and who manage their contracts the best will have better options competing on price for the best grapes.  We made several observations and predictions beyond that and thought it would be a good week to restate them, and see how accurate we have been thus far.

This is what we predicted last spring, absent the economic predictions which you can read by clicking on the report linked above:
  1. Wine inventories evolving into a state of shortage that will last for some time domestically
  2. Increasing prices for grapes and bulk juice as growers finally start to see recovery
  3.  Increasing difficulty for nĂ©gociants to find wine of consistent quality for their price point
  4. Fewer private labels on the shelves
  5. More transitions, sales and mergers taking place than at any time in memory
  6. Continuation of new mergers in the wholesale networks
  7. Increasing plantings to feed the looming grape shortage
  8. Imports taking on larger market share compensating for lacking domestic supply
  9. Bottle price increases, but not a return to those prior to the recession
  10. Increasing difficulty for those third-party marketers who have sold with a culture of discounting
  11. Functional evolution of digital options creating a Fifth Column; a cobbled together group of wine businesses partnering with producers to sell direct and replacing the theoretical role of the wholesaler in a fully functioning supply chain.
  12. 2012 sales growth rates of 7-11 percent, a slight drop from the prior year
  13. Declining wine quality for the price paid, pushing consumers to decide if they are willing to drink lesser quality domestic wines, or pay higher prices, or find foreign substitutes 
Certainly #1 is the dominant change in the business this year. How'd we do otherwise? Anything you think was a miss on the predictions? I'm predicting someone will have something to add. (I just rolled my eyes in the back of my head to come up with that one.) 

Please join the community and weigh in on your views.

8 comments:

  1. Hi Rob,
    I agree with most of your comments but I'm not sure you are "on the mark" with #4. I am finding that buyers like BevMo, Target, Costco, Total, ABC etc.(the big box buyers)incrasingly are looking for PL/CL options.
    Cheers,
    David

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    1. Thanks David. We'll have to see how it plays out because I don't think the change is fully embedded just yet. I haven’t seen sales data on the volume of private labels compared YOY, but if you walk into Trader Joes today, there are significantly boxes of wine out, and the percentage of PL's seems to have switched to fewer domestic and more imported. Last year you could find Willamette Valley, Santa Lucia Highland, Napa Valley, and Santa Rita Hills Pinot Noir sold under the Vintus. Those appellations aren't giving up cheap bulk anymore (maybe save Oregon).

      If a private label is building a brand, it has to have some degree of consistent sourcing and at this point, it's hard to maintain quality and not pay higher price for the juice, particularly in cabernet based blends. So the choice is to make lesser quality wines to maintain price points, or raise price on an existing PL brand.

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    2. I think the future of wine is a fast changing model. Retail groups like Bevmo etc can buy from all over the world and guarantee quantities taking very large volumes over periods of years. Young experienced winemakers abound ready to use their skills for these groups, Consumers have had the joy great quality wines for four years of the recession, and now look for that quality, and won't pay significantly more except on special occasions. The "good old" days of silly pricing (pre-recession) will not return quickly, if ever in my opinion, There is so much competition out there. With all the consolidation in wine industry groups (aka Foley and others) with multiple brands, all of the "talk" about shortages of juice, rising prices and not enough planting, can be filled from overseas markets in no time at all. Europe has been pulling up vines for years but can reverse the process quickly, and using high tech modern techniques, produce far more efficiently. Argentina and Chile are expanding production strongly... Australia is trying to get back into the US market, wine should remain inexpensive and improve in quality for a long time to come. WHich is the really good news !

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    3. Thanks LagunaSomm for weighing in. There are definately more choices than a consumer can handle. There are plenty of well priced wines and I agree completely consumers won't find the silly pricing anymore. But we are in a period of rapid change that will provide more opportunities for those who can identify patterns. On pricing, I also agree its not going up like it was anytime soon, but it is actually going up a little and will continue. IMO, the best hope for price increase is inflation.

      Thanks for the comments.

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  2. One possibility is that domestic production from other wine AVA's outside of the pacific northwest will increase both quality and quantity to exploit the situation...Catawba anyone?

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    1. Thanks Anonymous. My experience in times of shortage is wine brands move from smaller appellations to larger ones - like Rutherford, to Napa Valley, to North Coast, and finally to California appellation on a given label. Its not likely any can increase quality and quantity at the same time. That will take more than 5 years to get new plantings to a fully mature yield.

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  3. Hi Rob, thank you for your excellent blogs. I was wondering if you do much in the way of tracking trends for non-California domestic grape production and wine sales? One trend that I don't see mentioned (and perhaps its just too small to be on your radar) is the growth in other U.S. States. I'm not just talking about the northeast, I'm talking about New York, Texas, etc. I teach a class on an Introduction to Vineyard and Winery Valuation and I will be speaking at three non-California states next year at their request...mostly due to the need for a better understanding on vineyard and winery real estate valuation methods...I suspect because they are seeing a growing number of new plantings/buildings, etc. Points to increase locavorism perhaps?

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    1. Thanks for the comments JoAnn. We are starting to begin surveying the entire US in a Tasting Room Survey. That has been through one iteration now and I'm hoping for better participation when we take that on in 2013. We also get opportunities to speak across the country and at this point, even the world - Argentina this year and the UK and Israel perhaps this next year. Everyone wants to understand this intriguing space and much of what we do is transferrable to other States and regions. Many Colleges across the US and World now use our State of the Industry report as part of their curriculum. So the fact that its West Coast and fine wine based doesn’t seem to matter.
      There are wineries in all 50 States now, but CA, WA and OR represent the vast majority of production. Others such as NY and VA have established regional markets and we've looked at taking those on with a physical presence, but it’s hard to justify the overhead costs needed to start up an operation in those spots. Never say never. I could envision a day where we have representation in TX, NY, and VA but for the present it’s not on our radar.

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