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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