Sunday, July 21, 2013

Is Demand for Wine Dropping?




I saw the above video last week referencing demand for wine and the title got my attention. Is the demand for wine really falling? When you watch the video above many people might think so, but I don't really put a lot of faith in LiveEx as a measure of demand for fine wine. This might be speaking to Bordeaux largely and LiveEx might have use in other areas but not for overall consumer demand.

Last week we did a version of a Mid-Year State of the Industry Blog, but in it noted that its hard to do a State of Anything in a blog so we left out consumer demand. With this video clip from Bloomberg hitting the interwebs, I thought it might be worthwhile to debunk the above perspective.

In the 2013 SVB Annual Wine Report we predicted sales growth between 4% and 8% in the fine wine segment. One of the factors that we considered in the forecast was the expectation of a rough first part of the year as sequestration kicked in, pulling back the growth rate in demand. But we also believed the back half of the year would be better as we bottomed in the housing market and the consumer started loosening their purse strings.

It seems as though we were pretty close in the blue-print, but at this stage it appears sequestration didn't have the dire impact many in Washington predicted and in fact has improved the Debt to GDP ratio to the point where our Debt Rating was upgraded again to AAA. We have seen the bottom of the housing market and continue to see improvement in consumer and retail spending though it remains to be seen how we did predicting the back half of this year. That said, according to information provided from Wines & Vines in cooperation with IRI, off premise sales through July are up 7% for 12 months.

Moving to one more perspective, a compilation of data provided by Demeter Group shows continuing growth in overall US consumption, consistent with flat to declining hectares of production. That gap between what is planted and what is consumed is being met with imports. The 2012 harvest size at this point in the year has slowed down the continual march upward of the growth in market share for imported wines. That said, as of this writing and as mentioned last week, the harvest in the Southern Hemisphere appears good, and with the US Economy still seemingly recovering ahead of the rest of the world, one has to believe the dollar should strengthen against a basket of currencies thus favoring import growth.

Of course this is such a big topic and only a small top-of-mind commentary on where we sit today, but I don't want to lose my Blogger Credential that requires brevity in prose. Hopefully this is enough for you to agree with me the Bloomberg video above isn't properly representing the state of consumer demand in the US. Consumer demand for wine continues to rise by all measures and if our early year forecast proves out, should increase YOY through the end of 2013.

 

What are your thoughts? Please log in and offer your views about growth in wine sales and consumer demand at this point in the year.


13 comments:

  1. Rob,

    I've long been fascinated by this chart from the Wine Institute: http://www.wineinstitute.org/resources/statistics/article86

    What I've often wondered about is what caused the previous high in per capita wine consumption (in 1986, higher than any
    time except for the present day) and what caused the decline starting in 1987? From what I recall, 1988 and 89 were fairly robust economic times yet there was a decline in per capita consumption that continued even through the French Paradox-60 minutes report in 1991. Likewise, it seem curious that there has been continued growth in per capita consumption even during the recent recession.

    All of which makes me wonder what general tie-ins one can make between the general economy and wine consumption.

    Any thoughts/insight?

    Adam Lee
    Siduri Wine

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    1. Believe it or not Adam, what I think you're looking at is the wonderful run of the Wine Cooler! I'm sure you remember the product, the big splash made in the early/mid 80s with killer TV campaigns (and thank you for your support), that soon softened a little as beer advertising became more prominent (Bud Bowl etc.) because they felt threatened. In 91 there was a big hike in excise taxes which resulted in malt-based coolers, ZIMA, Mike's Hard Lemonade, etc.

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    2. 707WineGuy is absolutely correct, the increase in consumption is from wine coolers. The decrease a few years later is a result of the shift away from wine as the base product and to clear malt base products for tax purposes.

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    3. Also, the current upswing despite the recession can be largely attributed to demographics. Gen X is hitting their larger wine-consumption stride at a median birth-year of '74 and Millenials are turning 21 in droves with a median birth year of '92. Wine is thankfully a widely acceptable beverage, even for entry-level consumers. These are huge populations (each as big as the Boomers) that will be major influencers for the next 30+yrs.

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    4. Thanks for the post 707WG. I completely agree with your assessment.

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    5. Fascinating....thanks all. I had (perhaps purposefully) tried to put wine coolers out of my mind.

      Adam Lee
      Siduri Wines

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  2. Adam -
    In the late 80's we were emerging from a double dip recession or a really long single recession depending on who you believe. It was very similar to the Great Recession from the perspective that real estate values and asset values were hammered, but unlike today, the recession itself was triggered by a supply shock when OPEC raised gas prices, and then compounded by the Fed under Paul Volker who hiked interest rates to kill wage and price inflation. We saw a prime rate of 21.5% in 1982. You can imagine the impact that had on small business.

    Emerging at the back half of the decade, we saw personal values in America evolve to include a greater emphasis on health and exercise. Mothers Against Drunk Drivers which started in the early 80's really got a foothold in the press forcing down drunk driving blood limits nation wide. It was the end of the 3-martini lunch that you can see stylized in the TV series Mad Men.

    Then two things happened to change that: 1) The French Paradox aired in 1991 on 60 Minutes and 2) The median age of the Boomer reached 35 around 1994. That didn't change behavior overnight and Boomers didn't take up their parents proclivity for drinking and business lunches, but wine became more and more popular given, the touted health benefits.

    To the question, what are the tie-ins one can make? We've discovered wine is recession resistent, but not recession proof. Changes in consumption aren't just due to the economy. Changes are also subject to supply shocks outside of the economy which impacts price and consumption, and fads such as what we've seen in Coolers, Wite Zin, Chardonnay, Merlot and Muscat each of which went though rapid changes in consumption at a point.

    So while you can draw some long term conclusions from population studies and behavior changes as discussed above, the economy will still play a role in the shorter term and is a foundation for overall demand in the longer term.

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  3. @Rob
    I think LivEx is a great commentary on fine wine and current market issues. The run up in Bordeaux prices were mainly driven by the Chinese and currently China's growth has hit a rough patch not to mention Europe's, so it makes a lot of sense that prices are weak. Also, it should be noted Treasury Wine's destruction of inventory was because of poor US demand.
    http://online.wsj.com/article/SB10001424127887324348504578607221851262206.html

    @Adam
    Much of the data we get is easy to misinterpret. IMHO,I don't think from this Wine Institute table you can glean much about the high end Cab connoisseur in '87. But if you want a narrative in 1987 we saw the largest single day decline in DJIA.

    Austin

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  4. Thanks for weighing in arm50. I agree with your comments on China's thirst for Bordeaux and LivEx, but I don't see the same decline in price in high end wines here. If anything, the higer end of the fine wine business is going up, not dropping.

    As it relates to Treasury Wine Estates, I don't see their situation as representative of the US Market for fine wine as their situation isnt repeated in other companies. Treasury has for years been an underperformer and an outlier. Hopefully this is an opportunity for them to clear the decks and show improved performance going forward.

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  5. Rob: Thank you for upholding Betteridge's Law of Headlines.

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    1. Blake - I had to look that one up. For others reading:

      "any headline which ends in a question mark can be answered by the word "no." The reason why journalists use that style of headline is that they know the story is probably bullshit, and don’t actually have the sources and facts to back it up, but still want to run it."

      I was taking the Bloomberg headline but rather than twist out the "no" gave it up early. All that said, I figured people would want to know the answer and check the blog out. I kinda feel dirty..... a little Yahoo-ish for this headline

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  6. Re: trends here in USA. I wonder, if the per capita number is down, maybe because the number of drinkers is increasing, but a lot of the new drinkers co not consume as much as the average, at the beginning?

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  7. MAW - Thanks for weighing in with your thoughts. Per capita consumption is up across the board in the US, but falling in traditional wine drinking countries. The US still has upside in growing PCC because the percentage of consumers who drink wine is and should continue to increase. That should drive the increase in PCC for the forseeable future.

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