Bottle Prices Are Going Up in 2016

How much does this wine cost?

The Annual Wine Conditions Survey is open and delivering interesting early information on supply, price, and many other interesting questions. The survey closes next week but after the first week, almost 300 of your fellow wineries have invested 12 minutes. Why take the survey when we are all busy? Because participants are the only ones who will get complete results.

 

      Demand

Supply, Demand and Price are interlinked in macroeconomics. So when we look at the opportunity to raise prices, we also have to do so forecasting supply and demand.

 

Demand is a more difficult thing to predict versus supply and will be a lengthy point of discussion in the SVB Annual State of the Industry Report. The short treatment for now is we have to predict where the consumer will fall out next year.

Looking at the volatility in markets of late there are a lot of questions about the domestic and world economy. That's underscored by the Fed, who if they believed the economy was really doing well, would have raised rates by 0.25% at the end of Q3 ( .... which was my prediction in the Annual Report last January .... ok so I was wrong for once!) 

When I look at growth in consumption and price, I want to see where things are moving on the margins, meaning: where will the economy improve or fail? In the USA that focus has to be on consumer spending as that is about 70% of our GDP and consumer spending is improving at the moment.

What the Fed has really been waiting on to raise rates is wage growth, which is a reflection of employment conditions. (We get wage growth when labor markets are tight.) But another bonus to the consumer today is Oil Price which continues below $50 a barrel. That puts dollars in the consumers pockets which can be spent on wine (Unless you are in Houston, TX)

      Supply

If there is too much wine on the market, arguably its hard to raise price. Everyone is trying to guess on harvest size at the moment. Its always a fun activity. The chart to the left is from the open SVB survey but even without final results, it's pretty revealing with 62% saying harvest was less than average and a full 25% saying yields were near historic lows for their winery, versus only 10% who report record high yields. 

Wouldn't that be nice to see broken out by your region and case size? Did I mention only people who take the survey get the complete results?

Of course the short supply this past harvest has to be taken in context with what is demanded and what kind of wine is available for purchase. In this case, the wine business will look at 2015 as another in a blessing of vintages where we got what we needed at the right time. (Good planning Mother Nature!) If the last vintage was another record, we would have no place to store the wine that was crushed and even with it, my early guess is we still largely have a little too much wine available.
 

      Price
 

So where is that going to get us with respect to price? Like all things in this business, it depends on where you make the wine. The Central Valley of CA which produces entry level wine has growers in a world of hurt today. They have too much acreage planted, water issues, competition from tree crops which are producing better returns, imported bulk cutting into their market share of domestic production, and brand identity questions, the later of which is an entirely different subject that we'll take up later.

Selling Napa Cabernet on the other hand is a lovely experience these days with balanced cellar supplies and growing demand. Other regions and varietals are between those two extremes, but today 'trading up' is the norm and wine as an affordable luxury is growing in price and volume.

Early returns from the above SVB Wine Conditions Survey chart above, show that almost 42% of respondents believe they can take a small increase, another 18% believe they can take a larger increase, with 35% believing they can at least hold prices. Only 6% are considering price cuts.

 

The results thus far are just slightly more optimistic compared to last year. That's an interesting conclusion when the world's economies are still struggling and our own GDP isn't setting any records. That said, I think the early results of the survey are probably about right and we will see bottle prices going up in 2016 slightly overall.

 

      "Trading Up" Still Going Strong

 

Other information that I have from Nielsen to the left demonstrate that for 52 weeks ending 8/15, total table wine was up in dollars 4.2% but only up 1.4% in case volume. That suggests that price overall has been increasing the past year and looking at the table you can see why.

The lowest end of the market is struggling and the higher end of the market is doing well. Nine to twenty dollar prices show the most strength from this data set however it should be noted the $20 and above segment lacks the impact from direct sales as Nielsen doesn't capture that. Other information I have on DtC demonstrate the $20+ segment is performing similarly to the $12-$20 price points shown above.

This is obviously a topical view at this point but can't you see how getting the complete results of this survey might be a good thing? I hope you jump in and support this annual effort.

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