Wine: It's what the young consumer wants. They just don't know it.

 

The beginning of change is understanding.

Each January in California, we are all enlightened by the Unified Wine and Grape Symposium, the DTC Wine Symposium, the Sovos ShipCompliant DTC Wine Shipping Report, and the Silicon Valley Bank State of the US Wine Industry Report. I'd like to say I attend them all, but some overlap. I do make it a point to attend the SVB State of the Wine Industry Videocast though. To allow flexibility, SVB records the video presentation of the SVB Report for replay. 

US Government Recommending Lowered Alcohol Guidelines and Enhanced Cancer Warnings

 

The Political Tug-of-War

The title of this post reflects the actions the Surgeon General is promoting. It's part of a long-term, well-thought-out, and well-funded campaign against consuming alcohol - any amount of alcohol. The campaign runs circles around anyone wanting to point out the other positive health science behind moderate consumption. But this report shouldn't be a surprise to anyone. 

Is this a correction, or a small road bump?

Are the industry headwinds part of a secular correction or just part of a normal business cycle?

The answer to the last sentence is essential to grasp because it helps answer another question many are asking today: "How long will this instability last?" History can provide some guidance.

The 90s were a period of rapid industry growth that encouraged growers to plant more acres to catch up with demand. When those vines hit full maturity simultaneously with The Tech Recession, we were out of balance with demand.  

The excess supply of the early 2000s was erased quickly because the Tech Bubble was one of the shortest recessions on record, the demand for premium wine was increasing broadly, and some vine acres were removed from regions growing for lower-priced wine. 

That was an example of an inventory-driven imbalance. Within a few years, the industry adjusted as part of an ordinary course, mainly due to the strong demand for wine that drew down inventory stocks. With that setup, patience is a valid strategy.

    Over the past 25 years, periods of oversupply have always occurred concurrently with increasing demand.

There have been several periods since 2000 when we were close to being balanced, but a large harvest tipped the scale unfavorably. Looking at the nearby chart, examples include 2005, which blurred into the 2008 Financial Crisis. 2018 was another large harvest that coincided with the beginning of the current slowing consumption pattern.

All of the imbalances we've experienced since the mid-1990s have primarily been caused by overplanting or large harvests, and the industry has developed solutions to cope with periods of imbalance that might not work in our current situation.

    All we have to do is wait.

I was at lunch with industry friends in the spring when we debated this question: Is this just a normal cycle that we can wait out, or is it a secular demand shift that needs new solutions? 

My friends held strong views that this was just a cycle and everything would right itself in due course if we were patient. That belief is only partially right, in my opinion. 

All market imbalances eventually correct themselves, so that portion of their view was correct. However, patience doesn't always produce the desired outcomes. That's the part they missed that day. 

For at least a decade, I've been told that we just need to wait until younger consumers mature, and at that point, they will adopt wine like the boomers did before. That strategy has yet to correct declining demand. 

I've also been told that wine always goes better with food than other alcoholic beverages. While I agree, taking it as an unchangeable attribute has helped shape beverage lists that creatively include alcoholic beverages other than wine. 

In the 1990s, wine received a great gift in science: science proved that moderate consumption has some health benefits. We reacted as if the science was settled and did nothing as an industry to protect that gift. In contrast, the anti-alcohol movement did everything it could to chip away at that uncomfortable truth.

If we wait, supply will certainly adjust on its own. We've already seen that happen with some winegrapes going unpicked in every AVA on the West Coast this harvest. We all know what happens when grapes aren't contracted. The grower will lower the price to find a buyer, or they will remove the vines. Waiting, once again, isn't the right strategy.

    What we're experiencing today is different from past supply imbalances. 

This is not a small road bump. We are experiencing the first demand-based correction since the 1980s, the underlying trends of which were called out in the 2018 SVB State of the Wine Industry Report. 

Inventory imbalances can be corrected quickly when there is increasing demand like we've had for the past 25 years. Today however, demand for wine is declining - not for everything at every price point, but there are better strategies than waiting. This secular correction will take longer to rebalance compared to past imbalances unless we collaborate as an industry to regain our foothold with consumers.

Is the Direct-to-Consumer Channel Holding Up?

The answer to the title question is yes, DTC is holding up, but as most in the industry will attest, it's a nuanced response that requires a discussion. 

Sign up for the 2024 annual SVB Direct-to-Consumer Videocast presented next Tuesday, June 25th, to hear an expert panel discuss the findings from the 2024 Direct-Direct-to-Consumer Survey.

What can you expect? After researching the wine industry for more than 20 years and producing this report for well over a decade, you can expect the same thing you always get: an honest and balanced view of the current direct-to-consumer market. 

Would you like a teaser? Take a look at the chart below. 

What's the next business issue facing the wine industry?

Rabbit Island Sunset, Hawaii

I enjoy looking at vacation photos, especially now that COVID is no longer a problem. I’m presently taking a much-needed vacation where I’m spending time admiring the stunning Waimanalo sunsets on the island of Oahu. While I don't post many pictures on social media when I travel to Hawaii, or on cruise vacations I do enjoy learning about the history of an area and sharing it.

As I sit here with my curious green friend, gazing at Rabbit Island in the distance, my thoughts turn to the US Wine Business and its future. Some might find this a strange topic to ponder while relaxing in Hawaii and I would unfortunately have to agree. But this is what I enjoy.

Many people believe that the wine industry is cyclical, and while true particularly in grape growing, there are also distinct periods in the industry that are characterized by unique events that don’t repeat themselves and shape the industry. Those eras typically last from seven to 10-years.

THE LAST GENERATIONAL CHANGE

Layoffs in Wine Country

Following the takeover of Silicon Valley Bank by the FDIC on March 10th, I found myself needing to take a break from watching the news for several weeks. Our company had become the main subject of every news outlet, and unfortunately, it was for all the wrong reasons. The constant coverage of the "ugly news" was difficult and painful to endure. The experience only added to the already stressful situation for both employees and clients.

Now that things are back to normal in the wine division, we're happy to get a break from all the ugly news updates. It is starting to feel like we're settling into a new routine, but nothing lasts forever.

What Ended Up Happening to SVB's Wine Division?

 

Photo by Maksym Kaharlytskyi on Unsplash

During the SVB meltdown last month, I wrote each of the first three weeks regarding the ordeal we were experiencing to keep interested parties apprised. There was a lot going on, and an infinite number of possible outcomes for the Wine Division. There was no assurance that the thought leadership we provide the industry would continue.

When the FDIC owns you, they don't ask what you want. We could have been sold to one of the largest banks, in which case we would have been absorbed and lost our flexibility and identity. It was possible we could have been split up and sold by divisions, or if there was insufficient interest, they could have sold off loans one at a time. None of those possibilities took place. What ended up happening to SVB's Wine Division?

I wrote the last post a month ago, right after the bank was purchased by First Citizens Bank, where I said: 

"From everything we are seeing at this early stage, we're starting to believe we've somehow landed in the best outcome imaginable for our clients, employees and our community."