Sunday, January 3, 2016

What Does the Wine Business Fear Most?


      Do-Overs

With the New Year's Resolutions on our minds, one related question someone inevitably brings up is "do-overs." If you had a chance to do anything over, what would that be?

I have more than my fair share but I'll throw out one. It's the story of the young lady who agreed to marry me when I was 21 and she was 18. I thought she was a real keeper and we were in love. She said yes! I was so excited until my brand new fiancĂ© said I had to ask her father and then reality started to set in. What if he said no?

In the evening, I took a bottle of sparkling wine to her home and with my knees shaking, got up the nerve to ask her dad, "Mr Lexon, I'd like to ask you to marry your daughter." That is the way I phrased the question. Of course it was very poor grammar. I wasn't trying to ask Mr. Lexon to marry his own daughter. It was me - I wanted to marry his daughter.

Perhaps it was that impressive elocution, or maybe it was the fact she had just graduated from high school - I don't know which, but he didn't have to think very long: HELL NO YOU AREN'T! His elocution was much better than mine.

The whole scene was actually much worse than that, but in my imagination before getting the hook I thought it was going to be just like a Hallmark movie with everyone living happily ever after. The film was to include me popping a plastic stopper on my cheap bottle of sparkling wine, right at the same moment I asked her father <cue the strings.>

Instead of a love story, it became a Syfi horror flick. What really happened was a fountain of sparking wine emitted from the bottle opening right as the stopper made a dent in the ceiling. Trying to keep the flow from damaging the couch, I reacted by putting my mouth over the bottle. But instead of stemming the eruption of bubbly, I ended up turning myself into a champagne fountain with wine gushing out of my puffed out mouth and then my nose! Then I awaited her father's decision.

Needless to say that was pretty embarrassing for me, so if I had that whole event to do-over, I would have never asked her to marry me in the first place. I would have instead focused on getting my life on track first. But looking back, the painful truth is her parents were right. They had seen more of life than I, and knew marriage at that stage of our lives would have been difficult if not a complete disaster.

While hard for me to believe, today I'm older than her parents were back on that surreal evening. Age brings perspective that can be applied to life and career. I've never stopped learning and growing, probably because by nature I'm always trying to understand why things are as they seem, how things work, and how to improve. That's why I started the Annual SVB Wine Conditions Survey a decade ago.

          Getting to the Point ....

I'm curious about this business, ill-trusting of what I read in the press, and want to help the business be better. So with this survey, I hoped to tease out for myself what winery owners are thinking and feeling. The survey results are now complete and were returned to the respondents in December.

One of the additions to the survey this year was a winery confidence index. You will read a little more about it when we release the State of the Industry Report on January 21st, but it's a little like the Consumer Sentiment Index.

Without getting into the details of the calculation, the index had about 10 questions that gave response options of positive, neutral, and negative. For instance, one of the factors was "The Economy" and respondents only had to answer how the economy impacted them; positive, negative, or neutral. With a little math we are able to discern where perceived strengths and concerns lie.

The places where the business evidenced the most concern were the impact from imports, and from substitutes such as craft beer, spirits and legalized marijuana. That could be a surprise to some, but I think the industry is showing it's combined wisdom plucking out those two issues.

        Foreign Competition

Who is most worried? We can slice and dice that up a little more and did so in the chart above. What it shows is the region most concerned with foreign competition is the Central Valley. That makes sense because of the negative impact they have felt from foreign bulk wine. As you move down the chart what you are seeing is regional sentiment regarding the fear of foreign competition. (It should be noted that the Central Valley did not deliver a statistically significant response and Mid-Coastal, CA is Santa Cruz and a few other adjoining regions that had few responses.)
My take-away is the regions that have the strongest brands are the least afraid. That is totally appropriate.

If you are a brand or in a region slugging it out with currency advantaged imports, you should be concerned today. Where do you find the weakest region or brand differentiation? In the lower price points. As the next chart shows to the above and left, wineries in the lowest price ranges are in fact appropriately concerned about imports.

          Imports and Yoda (Gratuitous Star Wars reference) 

One final chart that I think is worthwhile is the level of concern broken out by the number of years a winery has been in business. I didn't fare well in the request for my young lady's hand in marriage, but her parents were right to object because they had the benefit of experience. In the same way, if you want to avoid a business do-over, listening to those who have been through a few cycles is important.

Taking just the question of foreign competition and reviewing the chart, we can see an obvious trend. Those winery owners who have been around since about 1990 fear imports more so than wineries of a more recent vintage. Why is that? The folks with a little gray have been through enough cycles to remember when the dollar was strong against the euro currencies. In fact there was no Euro when they started in the business and there was a day when bottled imports made life difficult on U.S. wine producers.

Today foreign wine has about 35% of U.S. Consumption share, but the industry hasn't really seemed to notice or care because we've still managed to sell all the wine and see growth in the domestic business with improving price.
          Substitutes

What about substitutes like craft beer and spirits? It turns out the regions aren't lined up quite the same way as the AVA chart tracking imports, but I've left that chart out as I can't draw conclusions using that one. For what it's worth, the Central Coast of CA is the most concerned about substitutes. By price points however, the charts looks pretty similar between substitutes and imports.

The reality is the newest wine drinkers entering their consuming years are more discerning about the quality of what they drink, but less about the type of alcohol they consume. The regions and brands who differentiate the most, are the least impacted by substitutes. Those new wine consumers are a little different from the aging boomers. They are just as likely to drink an imported wine, a craft beer or spirits.

What does that mean for the future of the wine business? I think it's a good idea to listen to the elders who have their views shaped by experience. Listen to their concerns. My advice is that like my do-over graphically described in detail above, realize youth will be served today but experience and time will shape their behavior, beyond what you read in the press today. Their consumptions habits will evolve. Don't get married to the behavior prematurely, then expect them to consume and believe the same in 10 years.

What Do you think?
  • Can we give up more market share to imports tomorrow and still be OK?
  • Do experienced winery owners have a justifiable fear of imports?
  • Are substitutes (craft beer and spirits) a real fear?
  • And since I gave up my "do-over," if you had a chance to do anything over what would that be?

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  • 11 comments:

    1. More brilliant work from one of the smartest guys in the wine business. One thing I'm curious about -- size of the wineries and their sentiment.

      And putting the gratuitous Star Wars reference in a subhed will make the Google search bots so happy.

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      1. WC - Thanks for logging in and the question. Sentiment isn't something discussed above. This was a small cut from the Wine Business Sentiment Index. Your question is covered in the State of the Industry Report which will be released on January 21st, along with the live Videocast. I hope you tune in (Sign up link is the last bullet point above.)

        You noticed the pandering the the Google search bots! I always appreciate someone who gets the nuance. :o)

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    2. Replies
      1. Unknown 8:43 - I was wondering if someone would ask that one. Sadly, the answer was no. The very smart deal her parents cut was that we had to go to different colleges. If we agreed and love survived, they would offer their blessing. Sounds pretty old fashioned but I respected her parents and we both went along with it.

        It wasn't a Hallmark movie ending for me. I went off to Sac State and she to Santa Barbara and the distance ended things. I was broken hearted that it didnt come together but timing is everything and this wasn't good timing. I really wasn't ready without a college degree and managing a McDonalds before getting focused on school... I was without a life path that I only later discovered.

        The end of the story is I went further and got my MBA 8 years later. Like you, I was curious what happened to her. So partly because of that curiosity and partly because I wanted her mom to know that I found my path, I stopped by the family house at Easter a year after getting my secondary degree. She had married and was with a brand new baby.

        Back to the color of life and endings, standing in that living room with the dent still in the ceiling, I got to hold her infant. Sure enough, the baby threw up milk all over my new sportscoat. There was a fate message in there somewhere that even I could grasp, so I've not seen anyone in the family since. I hope they have all lived happily ever after just like their version of a Hallmark movie.

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    3. Rob
      What wineries need to fear is the US and world-wide economies and their so-called leaders. It's hard selling luxury goods in difficult economic times. For over 300 years any economy, may it be national, corporate or personal, that was highly leverage on debt, always results in a very very bad ending. And that is were we are headed in 2016 & 17. A few facts and observations.
      Every stock market crash has follow a commodity market collapse.
      I hope we can agree we are experiencing a commodity collapse? Couple that FACT with the amount of US & world-wide debt, to the tune of $225 TRILLION, of course the US leads the way. Talk about front running market trends prior to stock market collapse's, JUNK MARKET COLLAPSE. And we have a perfect storm brewing there: S&P distress ratio just jumped to 24.5% in 2015, 437 bond issues are now junk rated (10% higher than T-rates). Of that total, 127 in Energy sector, 71 in mining and 239 spread out in other sectors. S&P also issue down grades, due to corporate cash-flows shortfalls to 60 other companies who's bond values were $1.3 TRILLION. (They most likely were doing some share buy backs to prop up their shares to "earn" their bonuses. Funny how CEO's manage the stock $ but not the company core business).
      Then we have China whose fiscal managers must have attend the Janet Yellen School of Economics, they are going to discount (devalue) their way out of their low (3%) growth economy. Thus creating a currency war world-wide. Watch Mario Draghi drop the euro in response, Korea, Japan, Vietnam etc.
      The wine industry need not fear craft beer or pot but Keynesian Economics gone wild.
      Roll Tide

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      1. Edward - Thanks for logging in and the comments.

        I understand your perspective. There are many who share your view. Obviously there is a shift in commodities due to a slowing of world demand and industrial production. In some cases such as oil, that is exacerbated. While that can be a conincident or predictive indicator in past recessions or market crashes, it doesn't mean there will be either this time around.

        I see the world in a lower growth environment. All the industrialized countries are struggling to find growth and I'll agree the world economies are on fragile recovery paths. Something like a middle-east war that involves Europe could be a tipping point were that to happen.

        I take a brighter view that the US will lead the world higher. The delayed impact of the oil dividend with consumers should be seen in 2016 and with a little luck, we might see Europe begin to demonstrate some improvment as well.

        No question this isn't the economy we've been used to, but my view is just more positive than the one you lay out. And while that view is possible, I'll bet you hope I'm right too!

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    4. Rob:
      You are correct, I hope you are right. And thanks for having such a transparent site.
      Roll Tide

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      1. Edwaard - you are welcome. I appreciate your participation in the dialogue.

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    5. Hi Rob - very good, thank you. I collect similar data in Australia :) Perhaps we can do a comparison? Cheers - Robyn Lewis

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      1. Hi Robyn
        email me directly at rmcmillan@svb.com and we can talk about that.

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      2. This comment has been removed by the author.

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