Sunday, June 17, 2012

Rodney King & the Evolution of the Wine Consumer

The passing of Rodney King this past weekend was a sad event for me. I remember being so impressed with the man when he stood up to the cameras after the jury acquitted his attackers sparking the LA riots. He said simply, "Can't we get along?"  How many of us in that circumstance, having just been denied justice would have used that platform to complain about the verdict instead of being willing to utter even a single word to plea for a better world? It's hard to believe that was 20 years ago in April but it was, and the echos of  Rodney King's choices that day are still positively embedded in American Culture. He's left a positive mark. Time does move on though and with its passing, there is an opportunity to reflect on the evolution of events and cultures. While wine seems so far removed from the subject of Mr. King today, his appearance in the national press has given me a chance on this Father's Day to reflect on the past 20 years economically and the evolution of the wine consumer we're witnessing.

Without question, the largest factor changing the wine consumer in the past 20 years has been the aging of the Boomer. Since the middle 90's when the Boomer's median age hit 35, wine sales have gone up every year and that growth rate has spanned both the busting of the Internet Bubble and the Great Recession.

Our Bank's Chief Investment Officer Joe Morgan on Friday pointed me to a just released report from the Federal Reserve about the evolving wealth of Americans that gives a current view of affairs. The findings were consistent with the economic facts we saw year before last which drove our prediction in the 2011-2012 Annual State of the Wine Industry Report, for a slow, sustained, but long term growth pattern in fine wine sales instead of any quick recovery.
Looking back on the 'trading down' era in wine, the Fed Report noted the decline in average net worth was especially large for families headed by someone 35 to 44 years old. Median net worth for that group fell 54%. At times in our reports we've referred to this segment as the "Aspiring Affluent." They were the cohort who drove sales of affordable luxuries into the mass luxury market over the past 20 years. They were getting a foothold in their financial lives and with a little real estate equity, would spend ahead on their earnings, borrow using consumer credit, and then refinance their mortgages. That pattern supported higher wine pricing than that group can afford today.

That group's reduced net worth and financial status more than any other, was responsible for the decline in pricing power and the trading down effect through the crash. But we don't spend net worth. We spend cash or earnings. The Fed Report also pointed out a few interesting facts that are supporting the current rebound in consumer spending: 
  1. Measures of debt payments relative to income should have been expected to increase but in fact the average of payments relative to income actually fell. That was mostly due to lower interest rates and that fact helped retain more discretionary income for consumers to spend on wine purchases during the downturn. Said another way, it could have been worse.
  2. Incomes fell at a much lower rate compared to the drop in family net worth. Since we really spend income and cash more than net worth, this points to a more rapid recovery in spending patterns than one might otherwise expect.
  3. Across cohorts, average incomes show a life-cycle pattern, rising to a
    peak in the middle age groups and then declining for groups that are older. 
  4. The aging of the baby-boom population from 2007 to 2010 drove an 11.0 percent
    increase in the population aged 55 to 64. The last two points support our view in the Current SVB State of the Wine Industry Report that suggests Gen X is the cohort that has growth opportunity for Fine Wine Producers versus the Millennial Generation as many currently suggest. The Boomers aging are also a headwind to seeing any complete or quick recovery of pre-recession wine pricing.
The last 20 years have evolved our consumer tendencies, our wealth and income patterns, financial systems and hopefully, we've been able to learn from the mistakes made to make this a better place. I know that wine will continue to be a product that will bring people together in its own way, and that's a good thing. Of course that pales in comparison to the remarks Rodney King made that day in 1991 that soothed an angry nation. But anything positive in life is worth reflecting on.

A toast to Rodney King: That he was able to understand the depth of the leadership he demonstrated with a single comment that day, before he passed on. And a toast to all you fathers out there: That your own parenting will help evolve our children into the kinds of people who will evolve the world in a positive direction well after we are gone.

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