Sunday, June 23, 2019

How Much Did Wineries Really Make in 2018?

      The Wine Industry Shares Most Information


Unlike most of the business world, there's a sense in the wine business that sharing is part of community, and your neighbor is part of your support mechanism. They are not a rival nor are they a competitor. Everyone freely offers support in the form of information and time. If you need a tractor because yours is mired in a soggy field, no problemo! Need a little welding and custom fabrication on a pump? I'll be right over with a welding rig. Stuck fermentation? I'll send over a portable heating unit.

That kind of sharing happens all the time. But ask your neighbor for your wine club list, or ask "Can you show me a copy of your financial performance so I can compare my winery to yours?" The answer is always just < ..... crickets ..... >. 

When it comes to that type of question you'll just get a mixture of liars dice, false bravado, partial truths. The following cartoon I put together is the best explanation of how that game is played with your neighbors in wine country...

    

      Sales Growth in Premium Wine has been Slowing



In the 2019 SVB State of the Industry Report released in January of this year, we said 
"2018 was a good year for wine. Total wine sales for the year set a record, restaurant sales of wine were higher and premium wine sales were up as well. Strong consumer confidence and a healthy US economy contributed to the improved performance, but changes to long-term trends are telling us that we

are at a transition point as an industry."  
We need to stop and note that 2018 showed a small uptick in performance, but that was only in the Premium Wine Segment as you will see below. The under $9 categories continue to disappoint and dragged volume sales negative, but there were some positives in the year and we have to be grateful for that, despite longer-term negative trends.


      A Look Back at Growth


We've gotten used to premium sales growth rates averaging 13% since 2000, and in the wine industry as a whole, 3-4% sales growth and 2% case growth was the norm. 


Going back, the upturn started in 1994 with premium wine sales growth in the 1990s typically above 20%, and even that was stunted by short supply. 1994 was the year the median boomer turned 35; typically the beginning of peak retail spending.

Starting in the early 2000s traditional three-tier wholesale distribution started to fail for the small producer, leading to a scramble to push direct sales. That move progressed very well until the past four years when three-tier sales went through another down phase, and tasting room growth couldn't replace losses in three-tier.



Wine sales are still growing today but as you can see in the nearby slide titled US Wine Consumption Volume, volume growth with the rectangle highlighting the present period, is flattening. As alarming, total volume through retail grocery and drug; the orange line in the nearby slide, has turned negative for the first time since 1994.




      Major Trends Impacting Wine Sales


3 years ago in the SVB Annual State of the Industry Report, I forecast a decline in per capita wine consumption; the result of flattening sales volume and only a slightly larger adult population. That was a directionally correct call but slightly premature. If we've not already arrived there, we are getting closer to that today.




The issue the Premium Wine and Luxury Goods industry faces in the US is shifting demographics. The boomers who have driven the growth in premium wine are moving to retirement age. In 3 more years, the median Boomer will hit the full-benefit Social Security Retirement age of 66. The good news is they will work longer than expected, but spending will be muted particularly on luxury goods and alcohol.

With over 50% of the country's net wealth and a dominant share of discretionary income, there is no question the headwind of boomers moving to a fixed income will continue to impact spending on premium wine. And that ignores the reality that boomers will also be buying less volume as they age. 


      The Missing Millennial


While it would be natural to think the slightly larger millennial cohort should replace the spending of the boomers, that's not the case. The Indulgence Gap; an economic confluence of the Great Recession's echo, reduced financial opportunity for millennials compared to generations past and burdensome college debt are some of the factors that make those younger consumers an uneven financial consumer trade out for retiring boomers. 



But finance is only part of the issue. The troublesome confirmation brought out in the Annual SVB Wine Report this past January is that while the boomer is still drinking, the millennial is making no greater advance into premium wine and has stalled out at 16% of total consumption, as noted in the nearby chart. The outside edge of the cohort today is already 38. We should be seeing growth from that consumer, but as I've written in several other places including the annual report - the cumulative negative health messaging is taking its toll in consumption patterns, and having an even larger impact on the under 25-year-old age group.


  Wine Segmentation



Averages can be deceiving. Critical information is lost when we don't segment and in this case, there is a clear demarcation of winners and losers by price point. While total volume growth through May 2018 is negative 1.3%, it's clear all of the declines are showing up in the $9.00 and under wines. Bottles above $9.00 have both volume and value growth. 

The sweet spot for growth today is in the $12 - $30 price segments, with $12 - $15 showing the best patterns of both value and volume growth. Though total growth is muted, the consumer continues to seek premium wine today and there are pockets of good opportunity still.

    How Much Do Wineries Really Make?


It's easy to see growth rates and profits from public companies, but there aren't many public companies in the wine business. How do you get consistent financial benchmarking? 

SVB collects financial information every day and at any given time can present many different views of winery performance using our own proprietary database of actual winery financial statements. Our database now goes back decades which is pretty helpful for trending.



The chart nearby is one I present each year in the State of the Industry Report and use in many of my speeches. It represents a benchmark of performance for the average winery in the US.

In the chart, the red bars represent gross margin (total sales minus the cost of goods sold, divided by total sales and expressed as a percentage), and the green line is the pretax profit margin. Pretax profit margin is calculated after deducting interest and all other expenses, except tax. The blue line is the industry sales growth rate. You can back into total operating expenses if you are interested, by adding the pretax profit margin and the gross margin, then subtracting the sum from 100%. 

When the statements were all collected and input this year, because of the impact of US tax reform and added discretionary income in the pockets of consumers, wineries ended up having an improved 2018, with sales growth rising to 5.3% compared to 3.1% in the prior year. It's not growth in the teens as we've seen as recently as 2014, but it's better growth than the prior period. 

Gross margin started to have a more obvious DtC impacted result starting in 2013 but was flat in 2018.

On the cost side, winery owners have seen labor availability and grape costs escalate markedly in the past five years, though we are in an oversupply situation on grapes and juice at present, which is reducing grape costs off their highs. On the three tier side of the business, there has been an increasing request for added discounts and allowances. That said, wineries are finding increases difficult to pass on cost increases to new consumers who are signaling they have a lower indulgence ceiling. Those higher grape costs are presently all embedded in inventory waiting to sell.

Pretax profit trended higher in 2018 finishing the year at 10.6%, slightly higher than the 9.9% figure from the year prior. We'll take these results!


    Shoveling out Tanks


I don't have all the answers, but I know the business is changing rapidly and that requires a response. 

It's critical we address the hijacked science that is producing preposterous conclusions about the negative health consequences of moderate wine consumption. That's something all of the alcohol beverage industry needs to take on. 

We need to evolve the way we sell and market wine to include the young consumer as well. There is no choice. We can't hold on to the aging consumer or expect the seldom-mentioned GenXers to continue to produce 75% of the current growth rate in wine. That's not sustainable.

We need to be more thoughtful of changing the current tasting room and wine club model and define scalable methods to create an experience and build brands remote from the winery.

The wine business is not something you do as a gracious retirement anymore, which was the case in the '80s and '90s. The business, like all of life now, is churning faster and those changes will require a little bravery to face and adapt. But I also am convinced when presented with a clear challenge, the wine business will respond. Well ... the challenge is clear!

I encourage you to read the Annual SVB Wine Reportdig in deeper to this discussion and help create the dialogue below.



What are your thoughts? Are you feeling the sales slowdown? How are you passing on higher grape costs? What strategies are you using to operate in the evolving consumer environment

  • Please join the site in the upper right hand of the page.
  • Offer your own observations and opinions for the benefit of the wine community below. 
  • Promote this discussion on your favorite social media platform please.

    14 comments:

    1. Hi, first of all thanks for a great article. Do you have info on sales/profits by region (where the wines are produced, and/or where they are sold? Thanks

      ReplyDelete
    2. Unknown 12:36 - yes. We have financial benchmarks which are the agglomeration of prospect and client financial statements that we can dice up in many directions. We share that with clients only.

      ReplyDelete
    3. Thanks for your thoughts, Rob. Your annual report is always rich in insight, and even this overview is very thought-provoking.

      As a Gen-Xer (yes, we DO exist!!) I believe a big part of the lagging sales for us and the millennials isn't so much in the health space, or the uptick of cannabis as the report suggests, but in what you mention near the end of the blog post:

      "We need to evolve the way we sell and market wine to include the young consumer as well,"
      and "We need to... define scalable methods to create an experience and build brands remote from the winery."

      Wineries need to stop selling the aspirational life style and reach X'ers and Millennials where they are... not how the Boomers wanted to be.

      X'ers and Millennials appreciate being be approached with facts and don't want to be "sold."
      Guide us. Help us discover. But don't tell us what to do.
      We don't want to drink the same wine that everyone else drinks because it is "cool." There are too many options for that. We want to spend our money on what we will truly enjoy. So help us find it.

      *Full disclosure: VineSleuth is a company that offers a way to do just that. I built it because I felt a need.

      ReplyDelete
      Replies
      1. Thanks Amy. Appreciate you logging in with a name. Always better than Anon or Unknown.

        Also appreciate the kudos. Thank you!

        I'll disagree with one perspective. You said, "wineries need to stop selling the aspirational lifestyle ... " The problem with stopping something that is successful to the current set of stuffy customers ... is they are your current customers and the largest set of buyers. So we have to be careful about halting marketing that supports success.

        My view is "we need to evolve the way we sell and market;" not to the exclusion of the existing customers, but in a way to attract new customers.

        This is the first time in US history we have two large and meaningful cohorts at different ends of their buying lives. And both have different values and desires. So it's not easy to market to both - but that's what we have to do to be successful.

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      2. Rob, I agree with you that we shouldn't stop marketing to Boomers in a way that speaks to them.
        I could have been more clear to state that we need to stop marketing to X'ers and Millennials, specifically, in that fashion. As the data shows, those methods are not working for those two groups.

        Delete
      3. Evolving into an ever-evolving digital marketing landscape will require to test, fail fast, learn, improve and repeat.

        Delete
      4. "Fail fast" motto-turned-meme:

        From CNET Online
        (posted April 30, 2014):

        "Zuckerberg: 'Move fast and break things' isn't how Facebook operates anymore;
        CEO Mark Zuckerberg distances Facebook from its early, hacker-geared motto to a more mature one focused on stability."

        URL: https://www.cnet.com/news/zuckerberg-move-fast-and-break-things-isnt-how-we-operate-anymore/

        By Nick Statt
        Staff Reporter

        -- AND --

        From CMO "Opinion" Section
        (posted January 4, 2016):

        "'Fail Fast' Is Failing Your Customers"

        URL: https://www.cmo.com/opinion/articles/2015/12/8/fail-fast-is-failing-your-customers.html#gs.n2pzno

        By Jon Reily
        VP, Multichannel Commerce Strategy
        Razorfish interactive agency

        Delete
      5. Hi Bob, I appreciate your angle and point of view. In my opinion, maturity cannot be reached unless a baby starts crawling, taking its first steps, tumbling, falling down, learns and continues to grow up. It's a process and you have to start somewhere (usually at the bottom, at the lowest step of the stairs). So don't take the 'fail fast' approach verbatim.

        As Jon Reily suggests on the opinion article you cited: "we should be trying to get feedback faster and then use that insight to shape better experiences." and also he suggested include the customer earlier in the process and taking into consideration their feedback are all valid methodologies as well. The issue I see the wine industry faces is that is not seizing the opportunity to sit at the table with the younger generation that will inevitably be the one with most acquisition power in the near future. When considering that, then 'failing fast' > inaction.

        Delete
    4. Thanks again Rob for the quality of the analysis. I really believe as you said that wineries can reach out to people and strengthen their brands by offering remote experiences to consumers. That is where digital communication has a key role to play. We see it more and more today with larger wineries putting effort into reshaping their digital communication strategies.

      ReplyDelete
      Replies
      1. Corentin and Amy:

        Here is a resource you and other winery marketers can turn to for publicizing "remote experiences":

        URL: https://www.localwineevents.com/about

        I'm sure that website founder Eric Orange would be delighted to work with you and your clients.

        Contact: eric@localwineevents.com

        ~~ Bob

        Delete
      2. Corentin - Thanks for weighing in. I agree 100%. Digital marketing will play a large role in taking the experience out of the tasting room. That's not to suggest it replaces it - or that it's the same experience. We have to continue to do what is successful and evolve to digital, defining consumer experience with the same force we've taken on hospitality at the winery.

        Delete
    5. Rob writes:

      "The wine business is not something you do as a gracious retirement anymore, which was the case in the '80s and '90s. ..."

      In California, family-founded and -owned wineries rarely make it to the third generation.

      (According to the USC Marshall School of Business -- as quoted by the Los Angeles Times in 2016 [URL: https://www.latimes.com/business/la-fi-portos-20160422-story.html] -- "Only 30% of family-run companies make it . . . from the first generation to the second. Only 12% make it to third generation and less than 5% make it to the fourth generation.")

      The founding parents' mid-life career change for a bucolic lifestyle in "wine country" has led to an overplanting of selective wine grape varieties.

      That oversupply is now chasing falling consumer demand, depending on the retail price point.

      That is short-term financial "good news" for wineries purchasing lower priced per ton contract fruit in the open market. "Bad news" for vineyard owners having few "horizontal" / "adjacent" markets to alternately sell into. [*]

      [*See Michael Treacy’s business advice book titled “Double-Digit Growth: How Great Companies Achieve It No Matter What” for a discussion on “adjacent markets.”]

      ReplyDelete
    6. Dour statistics for wineries that annually produce 5,000 to 15,000 cases of wine:

      Excerpt from Wine Spectator Online
      (November 12, 2013):

      “West Coast Wineries Are Up for Sale -- Quietly”

      (A wave of recent deals show investors see opportunities in wine, while owners see an exit strategy.)

      URL: http://www.winespectator.com/webfeature/show/id/49221#.UoI_yAMMzG8

      By Tim Fish

      “. . . While small wineries can succeed by selling most of their inventory direct to consumers and large producers have muscle with wholesalers, those in the middle — annual production of 5,000 to 15,000 cases, for example — can’t get much attention from distributors unless the brand is hot.”


      -- AND –


      Excerpt from Wine Industry Advisor
      (March 22, 2017):

      “New Company Breaks Barriers to Distribution for Small Producers”

      URL: https://wineindustryadvisor.com/2017/03/22/libdib-breaks-barriers-distribution-small-producers

      “Consolidation continues to make distributors bigger and fewer while the number of producers grow with new small producers enter the market. The vast majority of wineries in the US produce less than 5,000 cases, and they’ve been effectively blocked from three-tier distribution because distributor giants wont take them on . . .”


      -- AND –


      Excerpts from The Gray Report
      (July 31, 2017):

      "Wine trade secrets revealed at OIV Wine Marketing Program"

      URL: http://blog.wblakegray.com/2017/07/wine-trade-secrets-revealed-at-oiv-wine.html

      "John Collins, CEO of a company called GreatVines that sells alcohol distribution software, started the week off with a slap in the face to all wine companies: 'None of the wine companies are getting any attention (from distributors). Period. Because the spirits companies are that important to the distributors.'

      "Collins compared the profit size of Diageo, a huge spirits company, to Jupiter. Gallo, the largest wine company, is Neptune. And if Gallo doesn't matter to a big distributor like Southern Glazer's, no wine company does. . . .

      "The opposite of Constellation was a presentation by Bruno Walker, director of sales and marketing for Chambers and Chambers Wine Merchants, a California distributor with an outstanding fine wine portfolio.

      "Walker was one of several speakers to caution people that large distributors won't do much to sell wines by small wineries.

      " 'If your wine is not on some kind of special of the month, it won't sell' at a big distributor, Walker said. 'That sales person is not out making presentations of your wine. Their manager is telling them, you've gotta sell this and you've gotta sell that. That's how their bonuses work. That's how they're hired and fired.'

      "But Walker also chilled expectations for what a distributorship like his can do.

      " 'The reality is, I have 15,000 unread emails,' he said. 'Most people are really, really busy.'

      "He said that when his salesmen present wines to stores or restaurants, they only have about 45 seconds per wine. 'We have to be able to deliver a compelling story, quickly,' he said."


      -- AND –


      Excerpt from Shanken News Daily
      (June 14, 2019):

      “The RNDC-Young’s Deal Creates A New Landscape Within The Middle Tier”

      URL: http://www.shankennewsdaily.com/index.php/2019/06/14/23247/the-rndc-youngs-deal-creates-a-new-landscape-within-the-middle-tier/

      “With yesterday’s blockbuster announcement that Republic National Distributing Co. (RNDC) and Young’s Market will join forces to create a 33-market, $11 billion distribution giant, the middle tier’s long-term consolidation trend continues.

      “The RNDC-Young’s combination will boast a market share of nearly 19%, behind top-ranked Southern Glazer’s Wine & Spirits at 32%. The top two distributors nationwide thus will have an aggregate share of above 50%. Overall, the top 10 distributors will combine for a share of nearly 75% this year, up from 59% in 2010, according to Shanken’s Impact Newsletter.”

      ReplyDelete
      Replies
      1. Worth repeating: “The top two distributors nationwide thus will have an aggregate share of above 50%.”

        That is an oligopoly.

        Good luck getting your product adopted by a distributor. Good luck breaking out of that distributor's "book" and getting "boots on the ground" attention by the sales reps calling on wine stores and restaurants . . . whose monthly and quarterly and annual sales commission/bonus income derives from meeting sales quotas for national brand "push" products dictated by the distributor's corporate headquarters sales office.

        Delete

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