Wine Supply is Entering Unknown Territory

Grape Supply Cycles

The wine business runs in cycles when it comes to planting. Trying to guess which grapes are needed and just when they are needed is a trick, especially when it takes 5 years to get a fully mature yield. And it's impossible to predict planting decisions effectively without making some guess on demand.

We have been through excess before, but the cycles aren't always created by the same circumstance and this one is unique.

Wine Supply is Hitting a Tipping Point

I've been pointing out the slowdown in the growth rate of consumer demand by volume for some time now. We are still growing as an industry, but the growth rate is slowing, particularly when looking at volume.

I began discussing shifting consumer demand and premiumization in the Annual State of the Industry Report as early as 2006. This is a pretty optimistic industry, so I was called a Debbie Downer when I started discussing the forward trends back then. That blow-back has since settled into a reluctant agreement. Instead of debating the facts as I've laid them out now, the discussion has settled into a strategy discussion.

Source: CA Grape Acreage Report

At some point in a cycle, an equilibrium point is reached as planting moves forward in response to growing demand. At that point, growers will slow down planting. 

The nearby chart shows a strong runup in planted acreage starting in 1995. That was a reaction to the start of the current explosion in demand for wine we've experienced for the past 25 years. Something changed to the slope of the line in 2001. That pause was created when planted non-bearing acreage became bearing and coincided with the Dot.com bubble and recession. From there, planted acreage fell into a more predictable but slower pattern, supported by healthy consumer demand. 

In 2017, planted acreage hit another inflection point, and a new phase began with acreage removals adjusting for oversupply. That's an indication that we are fully planted, and supply has reached a point of excess. It's hard to argue that demand is growing substantially when acres come out of the ground. That said, looking deeper into this does reveal the source as declining consumer acceptance in lower-priced, high-production wine.

But from all the signs I can see, it appears we've arrived at that tipping point in supply. That will change a lot of things going forward.

Are Wineries Going to Buy Fewer Grapes in 2015?

Buying More or Less Tonnage in 2015?

Self-Imposed Marooning  

I know the above chart is a little hard to read. When I start working on the Annual State of the Industry Report each year in October, the industry starts off a little hard to read too. I kinda go into this almost shipwrecked mode and cut myself off from normal business interactions and then a combination of research, survey, interviews, and analysis eventually gets me to a point where I can start writing and eventually escape my self-imposed marooning. 

What I hate about the delay between finishing the report and publishing, is the world moves substantially at times and my predictions are out in the wind hanging there .... exposed to the elements for all to see. If my predictions were off when the paper is released, who wants to read the rest? Or, if they were on they can still sometimes be a retrospective view by then if events move quicker than expected. It's a little unnerving during the wait, but you'll have to tell me how I did when you read the report and watch the Live Videocast.

The State of the Industry report for this year is going to be released January 21st along with the live video broadcast. If you haven't, you can still sign up for that here: [register].
 

Oversupply and a Bubble Forming. Now What?

Somewhere early in the year 2000 my mother-in-law was moving things out of a vacation home in Mariposa CA. I volunteered my help. So together with Anthony; a young and fit assistant from the Starving Students Movers we started lumping furniture. During a coffee break where we enjoyed delicious Starbucks Latte, Anthony started sharing his stock investment strategy. Wait...what? Investment strategy? (Disclaimer: I'm invested in Starbucks at this moment.)

Anthony couldn't have been much more than 21 and it turns out he really was a student - a student taking a videotape course in "How To Retire BeforeYou're Thirty" and was day trading. He explained his trading philosophy: high growth Internet stocks. He had amassed a small fortune already and he did it all with credit cards and margin debt.

I started to wonder if I was missing out and perhaps being too cautious with my own investments. After a little more thought on my drive home, I called my broker and cashed completely out of the market. With the Tech Crash hitting just weeks later, I had discovered a new technical indicator that would define my investing strategy from then on. I called it, "the Starving Students Bubble Indicator (SSBI):

"When a Starving Student gives you stock tips, get the hell out of the market because it’s overbought."

Is it the Right Time to Start a Second Label?

 

Can I have Seconds?

 

It's that time in the cycle again. We are between balanced and long on grape supply in certain varietals and regions and we're facing an unprecedented 'three-peat' of great yields and quality in California after the upcoming harvest. The dearth of balanced supply with inevitably be the dearth of some business models over the next several years.

 

One consequence of these types of atmospherics is that clients start calling to ask me about the availability of financing and want my thoughts on the wisdom of starting a second label. That's an idea on its surface that might seem to be a low-risk proposition - after all, you have been blessed with inexpensive grapes or available bulk - but building a business strategy on a temporary supply issue can make an already bad situation worse in most cases - but not all.

 

There are some instances where starting a second label makes a lot of sense, so please email me if you're a client and want to talk about your specific case. But for the benefit of others in the wine community to spur a little discussion hopefully, here are several real stories of wineries who faced the decision to start a second label in the last 15 years and some examples of success:

Beringer & The Morgan Stanley Report

Beringer Vineyards & Winery

I had some really intriguing calls the past 6 weeks that all come out of activity in Australia and Treasury Wine Estates in particular (TWE.EX). The calls centered on Beringer which has been rumored for sale for years. Those rumors have grown since the disclosure that Treasury Wine Estates had Beringer destroy $150MM in wine inventory in the US. Things got more intriguing last week with the release of the Morgan Stanley Report that predicted dire shortages of wine supply. All that traffic out of Australia ... so I started to wonder if the two events might be related?

Inventory Days Higher, Grape Prices Headed Lower

Pig in a Python

Here's a late edit to this post: If there are 6 pigs in a 7 pig python and the python doesn't ....er ... pass one of the pigs, how many pigs can the python eat?

To really understand what's going on with inventory, you have to get a handle on the whole chain: Consumer demand, depletions, distributor supply, winery supply, imports, bulk wine supply, forecast harvest yields, and non-bearing acreage. I spend a great deal of time trying to sort through each of those to get a sense of what is coming next for the producers. Its a nerdly existence but it helps the winery clients who bank with me so I take the time, research, read, and talk to a lot of smart people.

Grape Prices are Heading Lower.

Total Wine Sales Continue to Move Higher

About six weeks ago I was asked to speak about the economy, the environment for the US wine consumer, and the fine wine business. The meeting was part of a management retreat for a large wine company and included an acquaintance of mine who we will call "Deep Gullet." It included many of the distributor partners of the company as well so there was quite a wide perspective on the business. This wasn't a client of mine and never will be, but I took the invitation because I thought I might learn something from Deep Gullet and the other presenters. I did and came away with two important perspectives:

1. The small 2011 vintage was really difficult for fine wine distributors. Allocations were more the norm for their retail accounts because there just wasn't enough wine produced.
2. Attempting to increase bottle pricing - even in an allocated environment has been like pushing a wet string up the hill.

Overwhelmingly everyone believed 2012 was going to be a lot better from a supply perspective given the large and record harvest, so the allocation issue was probably temporary. The second issue however was about the consumer and that didn't seem to be going away. That got me wondering again about the popular press reports on supply shortages.