Sunday, January 10, 2016

What if you Discount Wine and Case Sales Drop?

  
Source: Nielsen Beverage
      
      Just Slip Out the Back, Jack

It can be a little hard getting revved back up when the year starts. Truth be told, few of us are excited to jump back in full speed. We'd rather slip back to revel in the warmth of the holiday's then start executing on the new plan.

I have a little difficulty finding normal when the year starts because November and December find me researching and writing the Banks Annual State of the Industry Report. Add in Christmas, the New Year, business holiday parties, routine daily business issues and my birthday  - which falls on December 24th, but it's OK if you forgot. You can get me a gift next time. Anyway.... I can't wait to start the new year and find normal again!


       Make a New Plan, Stan


What is your plan for 2016? It probably depends on which part of the business you occupy. While I don't want to spoil the report's findings, one component that should be pretty obvious to everyone at this stage is the stark bifurcation of the wine business.
Above is some redacted information from Nielsen that I've marked up in a heat map to give a quick view.

It's in essence a color-coded view of the change in demand for wine in the U.S. What the chart shows is total wine sales by dollars have demonstrated strong growth of nearly 5% in 2016. That is higher than the 2%- 3% growth which is normal.

It's also showing that the 50% of the business that falls below $9.00 retail is shrinking. Not only is that part of the business shrinking, on the whole those low-price segments are discounting just to maintain the losses in market share they are demonstrating.

      Don't Need to be Coy, Roy

What would happen if they didn't discount? What would you do in that scenario? Would you discount more? You could sell less, but is that a good response? There is clearly an issue there and to the title question, what can be done at this stage to see those fortunes reversed? In plain language, discounting isn't the answer anymore than trying so sell less in volume to hold price constant. Both are nothing more than a death spiral. The only solution is planning and executing major changes to the business models in the low price wine segment.

This segment of the business is the purview of growers in the San Joaquin Valley. What my friends have endured in the Big Valley in the past decade has been painful to witness, with a change in demand for their product, substitutes in the form of imported foreign bulk wine replacing acres, and of late, an historic drought. And it goes without saying, they aren't the wine producer. They have been partnering with a few large wine partners who now are seemingly finding 50 Way's to Leave their Growers.

       Just Listen to Me

In order for the growers to turn things around, painful changes and investments will be needed to attract the next wave of domestic consumers. The region will need to develop and market their own unique character and develop it's own premium wine statement that will attract new consumers. While some might dismiss that likelihood, I firmly believe it is entirely possible and have delivered my thoughts directly to the leadership on several occasions this past year. It's a big task, but there are options.

But regarding the absolute lowest priced segments, we are told by international wine brokers that there aren't any countries even interested in producing for that end of the business today, which is quite a statement on both demand and the cost of production for those low priced wines.
       
      Hop on the Bus, Gus

Obviously to get 5% growth for the business as a whole, the other part of the business must be doing pretty well. That is demonstrated with the $9-$20 segments that are showing very good growth and making up for the decline from the volume end of the business. While half of the business is still $9.00 and below, the profitable side of the business is in excess of $10.00 and everyone is trying to get on that bus including Gus.

Many luxury producers might be wondering about the over $20 price points when looking at the headline chart. It looks like there is a decline in sales growth from the wines priced in the teens, to the wines made over $20. 

Information that we have in reviewed and audited financial statements of hundreds of wineries show that the Nielsen numbers are a little light compared to actual luxury winery results. Why is that?

      Don't Need to Discuss Much

I'm guessing the difference is because Nielsen information doesn't include much discussion at all of on-premise or direct to consumer shipments. While it might unnerve some to know that restaurant sales didn't do well in 2015 (that's not part of the explanation regarding the difference), our friends at ShipCompliant.com are telling us direct to consumer sales continued their strong growth last year. I can also report that the above $20 segment will end the year with a growth rate of about 14%-15% in total sales. That is in line with the prediction we made with last year's report. And substituting that number into the Nielsen report makes the bifurcated view of the market complete: Under $9 is bad, and over $10 is good

So the premium and luxury end of the market can now rest with the reassurance that all is well, right? Nope. In researching the annual report, I discovered some large emerging threats to the premium side of the domestic business that need action now to keep the domestic premium side of the business from experiencing some of the same causal factors that have led to the decline the generic wine growers have experienced.

           Just Drop off the Key, Lee

I hope you sign up to watch the live video cast on January 21st, and get a copy of the State of the Industry Report. The key to that task is signing up here: [LINK] The report will be a must read for anyone in the business and the video cast a good primer for those attending the Unified Symposium in Sacramento, where I'll be moderating the Thursday General Session [LINK] which I truly believe will be one of the most interesting sessions of the week.

         And Get Yourself Free.

I don't know that I mentioned it, but the report and live video cast are free. So in this case you will get it yourself for free......with total apologies to Paul Simon.





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  • Please comment below if you have thoughts or complaints to share



  • 15 comments:

    1. What is the event number so you can register for the video replay and receive the report?

      ReplyDelete
      Replies
      1. Sorry - try this link: http://bit.ly/1W0nO2s

        I got the same question when I tested the link to the Survey and Videocast, then I got the right one when I tried again. Not sure what the issue is, but I changed the links and hopefully that will work.

        Delete
      2. Still getting same page Rob, asking for an event number.

        Delete
    2. Making up losses with volume has been a favorite ploy practiced by San Joaquin Valley (and other areas of voluminous production)
      growers and wineries for the fifty years I can recall “If you are losing $1.00 per ton or per case, just make more tons or cases.”
      The quantitative fallacy is commonly embraced through greed, ego, desperation or just plain old ignorance.
      Ray Krause, Westbrook Wine Farm

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      Replies
      1. Thanks for the comments Ray. I appreciate them.

        Not sure I agree in this case. The high volume producers have made wine in partnership with growers who have planted and devoted long term assets to that production. For the past decade, that's been an increasingly difficult business for growers.

        If you go back to 1971, you find the growers were producing a quarter of a million tons of excess grapes annually. The large wine companies loved that of course because it drove down price. The growers didn't like it.

        From my vantage point, the growers in the San Joaquin have really been left at the alter in this latest revision of the business and a lot of acres will now be pulled. Everyone hopes to make a buck, so from that perspective - greed is good I suppose, but there isn't a lot of money to be made today in that market by our growers there. I hope they turn things around personally.

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    3. Even with low inflation, the under $9 bottle will continue to loose market share. Yesterday's under $9 bottle is today's under $12 bottle. Judging from the sales of Santa Rita 120 and Penfold's Rawson's Retreat, I'd say there are still wineries interested in serving the under $9 market. Bring them in and move them up, over time. Also, when the economy turns down again the low end of the market will pick up. Many, many wine drinkers start out in the lowest price range. There is a place for it.

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      Replies
      1. Thanks for the cogent thoughts RUS and for logging in too.

        Of course over time inflation will drive up the price of $9 wines to $12. But we aren't in an inflationary cycle today so I wouldn't bet on that. What is true is the large wine companies want that premium space and I believe that will make for more ordinary wines marketed in the $12 space ... which could have been $9 a couple years earlier. So ... it's saying something close to what you cite, though different causes.

        The San Joaquin growers had one good period in the 2000's during the great recession. As I have said in several speeches, waiting for a recession is not a good business model.

        That said, your last point is a good one. Wine drinkers almost always begin with lower prices and trade up as their tastes evolve. The fear for me today is those interesting wines being made for new consumers are often foreign, while before they were wines from the Central Valley. What does that say about our wine consumer tomorrow?

        Thanks again for the comments!

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    4. Event Number Please

      ReplyDelete
      Replies
      1. Sorry - try this link: http://bit.ly/1W0nO2s

        I got the same question when I tested the link to the Survey and Videocast, then I got the right one when I tried again. Not sure what the issue is, but I changed the links and hopefully that will work.

        Delete
    5. ALL - Sorry for the disconnect with some of your sign ups for the live videocast. It's inconsistent. I had a problem when I tried, then did it again a minute later and it worked.

      We think the issue is at a vendor and we are trying to sort it out, but keep trying that link. It will work ... maybe even now I hope?

      Thank you!!

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    6. Maybe they should rebrand themselves and change the story. Obviously their seems to be a market for it since foreign wines are coming in to fill in the void so to speak.

      Thanks great blog though.

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      Replies
      1. Thanks for logging in and the kind comments.

        There is a market, but not a good one for selling and not a good one for our growers. The big wine companies can't be blamed for looking for cheaper production inputs when a segment is under pressure. Foreign wine has filled that, but that bulk part of the market at this point is also dropping. We'll see if that continues. I do talk about that in the upcoming report.

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      2. Thanks Mr. McMillan. I was able to register look forward to your presentation/talk.

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      3. Your welcome Q. And please .... Mr. McMillan was my father's name. You can just call me Your Highness.

        Delete
    7. For anyone who struggled with signing up for the Annual State of the Industry Report and Live Videocast, I think we have corrected the issue and have re-inserted new links, but just in case - The event code is: 623 396 315, in case you see that page.

      The new link is: https://svbmeet.webex.com/svbmeet/onstage/g.php?MTID=e910d89b3bd3411450781ccee1e92da88 That's the same one in the text above.

      ReplyDelete

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