2014 SVB Wine Report Producers Cut

Another year of the SVB Wine Conditions Survey, the Annual State of the Industry Report, and the live video cast is complete. For those of us involved in the production - from my St. Helena Banking Team, the SVB Marketing & PR folks and the Video crew, it’s a labor of love but its also a real grind.

The report starts in late October with planning for the survey, and finishing in middle January with the release of the report and live video cast. The final piece of the report is publishing the transcript from the videocast chat, and answering some of the questions posed which we are doing below. At the end of the transcript, I have posted answers to many of the questions. You are welcome to comment here on anyone's post by logging in and noting the time of the post. You are also welcome to ask new questions and I will do my best to get you the answers. Please forgive transcript errors and double posts which appear often. That’s part of the chat landscape.

Questions You want Answered

 

The Annual State of the Industry report that Silicon Valley Bank produces takes a shrimp load of work to pull off and a lot more assistance than First Mate Dan. That’s why I stop writing the weekly blog in November. I have to dedicate my copious free time to research, composition, then production. Fortunately I have great people around me or I would drive my customers financial ships straight into the dock without their help.

 

I've been done writing since before Christmas, but the draft at this point has gone through 12 iterations. I know there are still going to be some tie-pos, ghrammaer and speeling mistakes in the 34 page report but all the read-throughs make me want to make me gouge out my eyes at this point. That's a clear sign that its ready for release.

What's Going to Happen Next?

Right about this time of the new year we're wiping off the gravy from the corners of our mouths, sending thank-you notes to those who sent us Holiday Gifts[i], trying to figure out how to quickly get rid of the dry tree on the side yard that's become a fire hazard, and feeling guilty about the fact the outside lights are still up on the house. You at least turned them off on January 2nd so that’s something I guess.

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?

Bra-Burning Feminists Drive Wine Sales

The business world moves in cycles, and if you live long enough you start to see them repeat. Today the popular press is replete with articles hyping the Urban Millennial Myth.

It's the older tradition-loving Boomers who have become accustomed to Madison Avenue solving every need, want and desire - versus the edgy up-and-coming Next Generation. The Next-Gen is nothing like you've seen before and you need to get current with your marketing or you will end up on the losing end of the stick.... or so many would have you believe ... except its really a repeat of a cycle we've seen before and we can see the outcome.

Boomers today drive wine sales and its the women Boomers who are the primary wine buyers according to many studies. Those were the same bra-burning feminists that were labeled as radicals back in the 1960s and early 1970's when they were Millennials. They were nothing like we've ever seen before either .... well .... there was Susan B. Anthony in a prior cycle but that's another story.

If you decided to craft a label to attract Millennials today, what would that look like? The press tells us Millennials are adventuresome, irreverent and demand transparency, sustainability, and authenticity. What about their desired product attributes in a wine purchase? What do they want?

An article that came out last week says Millennials are looking for non-pretentious products, non-traditional packaging, simple wines at an affordable price that speak to them; each are reported solutions for cracking the Millennial Code and developing a successful wine marketing program to that untapped pot of gold at the end of the cohort marketing rainbow.

Rima Fakih (Photo courtesy of Miss Michigan USA)

A restaurateur who targets Millennials, answers the question within the article noted above by talking about how he decided to create wine lists that ...

"...flout the bureaucratic rules that dictate how wine should be made. It’s an eclectic, slightly subversive list with a decidedly anti-authoritarian bent."

The description of Millennials and what they like sound eerily familiar ... non-traditional packaging, simple wines at an affordable price.... transparency, authenticity, adventure, irreverent behavior.....

The Highest Return on Your Time Invested

Each year I get to write a State of the Industry report that's pretty well received in the wine business. Its even used as part of the curriculum in several U.S. Colleges and Universities which my mom thinks is really cool. She thinks I should be given an honorary PhD by one of the Universities but I haven't been able to donate enough money to a place of higher learning so as to receive that kind of recognition. Der Weinerschnitzel is considering offering me a fellowship, but thats still in early discussions.

Millennials Aren't All That

Louis B Shrimperton III "LB3"

I have a large degree of respect for Tom Wark's dog Louis B. Shrimperton III. "LB3" as he likes to be called, serves as Tom's sounding board when Tom writes his daily blog and he's also a Millennial with a distinctive opinion. Having descended from the Flying Nun as you can clearly see by the above resemblance, he's able to give Tom a high-level perspective on things.

On rare occasions Tom writes an interesting blog and he did so this last week writing "Unsubstantiated: Millennials, Wine & the Meme." Tom addresses a pet peeve of mine when reporters and writers repeat equine excrement in what I've referred to as the Millennial Myths. That's the notion that Millennials are driving the wine business. Here's one quote from a newspaper article I cited in a recent blog I penned:

"the U.S. ranks third in total wine consumption, and is gaining rapidly on the leaders. Much of the (3.3% ~ 850,000 case) increase can be attributed to the Millennial generation"

The problem with this quote and an unending string of others ..... they just aren't real or helpful in describing wine business opportunity.

Experiment or Die

Stupid mistakes and do-overs. Come on. Admit it. You've made your share. I made a similar mistake to the lumberjack in the above video. Trying to save a couple hundred bucks by not hiring a professional, I cut a tree limb away from my sliding glass door. Cutting straight down with a chain saw the limb cracked and held together by the fibrous bark. Like a hinge it pivoted down, perfectly connecting with the glass door below shattering it to pieces. It cost me $1,200 to replace the door and I've never made the same mistake since.

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.

What's the Surest Way To Fail in Business?

This is my 50th post and I'm celebrating by taking a vacation and am writing this morning from my hotel balcony on Waikiki. That was an unabashed I'm-having-more-fun-than-you comment..... and I'm clearly warped to be writing on vacation... Anyway...

Going through graduate school I took a class in Organization Behavior. I liked the class because it was high-level and covered a number of important theories, and yet - the title of the course always bothered me. It seems like such a non sequitur. It's as if an organization has feelings or predictive behavior, and of course, it doesn't. Organizations and wine producers for that matter are made of people with feelings, perspectives, insecurities, and values. While marketing, sales, production, viticulture, and administration are all important parts of running any wine company, in the end without an established business culture used as a touchstone for behavior and decision-making, the other disciplines will struggle or even fail no matter how awesome the product or strategy. Leaving a company's values unclear or believing everyone just knows what you stand for without talking about it is the surest way to fail.

Are You Adjusting Your Marketing To Boomers?

Never Bet Against A Dog That Tells You They Can't Play Pool 

 

"If you aren't starting to make some adjustments in your current marketing strategy to Boomers, you will lose your most important current wine buyers sooner than you think, and another winery will pick that consumer up who will adapt to their changing preferences."

 

 

 

My mother plays pool, has an occasional nip, likes pink and is a dog. She's actually a wonderful person, but I've been trying to break her from nipping for years. Now it seems the years themselves are actually slowing down her nipping, which isn't good for the wine industry when considering her in terms of her Mature Cohort. A non-nipper wouldn't be the person a winery should try and attract. (Don't play pool with her either.) 

My mom can nurse a large bottle of moscato for a month. Obviously if she is representative of her generation, when it comes to developing a strategy to attack the geriatric set there are probably better places to invest your precious resources. But if you listen to many in the wine press, they will say its the Millennials. I believe if you sell fine wine and that's what you are going to do, I suggest you would be better off investing in my mom's cohort today because they can at least afford your wine, if you can convince them to buy it.

Wine Sales In the Last Half of 2013

The Best View of the Housing Bubble Pre-Crash

I recall giving a speech in August of 2008 to about 125 growers and winery owners. The speech was on the economy and I pulled up the slide above to demonstrate what I was seeing ahead of us. This was at a time just after Lehman Brothers collapsed where it had become apparent that we had crested a market high in housing and entering a bearish period. What the chart says in brief, is the historical average ratio of existing home price divided by median 4 family income is 2.8 times. That's what the red line is. With a ratio of 2.8 times, if a family made $100,000 a year, they could afford a $280,000 home. You can see what happened by late 2006 into 2007.

Do You Like Drinking Day-Old Wine?

My mom used to go to the Day-Old Hostess bread store. She would get apple pies and Ho-Ho's and freeze them for our school lunches. They were really good....maybe not that healthy but Hostess advertising said they were healthy snacks back then - wholesome goodness I think was the pitch line, and even day-old Hostess snacks never were stale. Of course now we know it was due to the overuse of preservatives which by themselves can cause a corpse to never decompose.

There is no Day-Old Wine Store for good reason. With Twinkies and Snowballs, freezing made the product usable on my schedule. With wine once its opened, you either drink the whole thing or risk letting the remnant oxidize. Personally, I hate oxidized wine but there's a dilemma. Do I drink a really nice bottle with dinner and have some left that might not be consumed? Or, do I drink a lesser bottle and not be as concerned if I have to dump it? Of course I can just drink the whole bottle, but the calorie thing is becoming a real problem these days .... maybe it was the Twinkies. Either way I blame it on my mother pushing me into addiction. Twinkies are a gateway drug you know.

I can't tell you how much day-old wine I've had to dump over the years. I'd hate to think about what that cost me; maybe thousands of dollars given my drinking habits stemming from my traumatic childhood. While I've not found a solution to my Twinkie addiction, I have found the solution to my dilemma of wasted wine. If you like this solution as well, there is a deal for you at the end of this blog - only for SVB on Wine readers.

 

Do You Know the Location of the First Successful Winery in the US?

This week we're moving off the normal marketing, economy, and business issues and asking a basic question anyone working in the US wine business should know:"Where was the first successful commercial winery in the United States?" Do you know? I confess I didn't know for sure. I remember thinking Jefferson was a really important figure in American wine and he worked at establishing a commercial presence in Virginia early on, so maybe Virginia was first? Surely with the native vines in existence, there must have been a successful wine businesses established before the time of Jefferson?

I had this debate over a bottle of wine with someone smarter than I last week. The discussion of "firsts," depending on where you live and who is telling the story can change dramatically, so the interwebs - which everyone knows is the possessor of all that is true - can sometime provide false information. The reality is the real beginning of the US Wine business has been butchered in history books and folk-lore. There is however a definitive rendering of the subject.

If you haven't ever read A History of Wine in America, I highly recommend spending the time to do so. I've even linked a free Google e-book to the above title so you have no excuse. The book sheds a bright spot light on the subject and will have you the envy at your next party where you win the attractive table centre piece for getting the right answer. That said, I know many of you are Cliff Notes kind of people and wont spend time in the book, so if you want the shortcut to the answer, read on.

 

Is Demand for Wine Dropping?

I saw the above video last week referencing demand for wine and the title got my attention. Is the demand for wine really falling? When you watch the video above many people might think so, but I don't really put a lot of faith in LiveEx as a measure of demand for fine wine. This might be speaking to Bordeaux largely and LiveEx might have use in other areas but not for overall consumer demand.

Last week we did a version of a Mid-Year State of the Industry Blog, but in it noted that its hard to do a State of Anything in a blog so we left out consumer demand. With this video clip from Bloomberg hitting the interwebs, I thought it might be worthwhile to debunk the above perspective.

Mid-Year State of the Wine Business

There are several thingies (......that's a technical economic term) that are happening right now that all link together in some form to drive components and the present direction in the wine business. Since this is a blog though, and blogs are generally top of mind and brief, discussing the state of anything is going to either violate the Constitution of the Blogosphere or the tenants of mildly meaningful research. Instead, I'm going to leave out a pantload (......that's another technical economic term) ... of discussion topics such as demand for wine, and go with the top 4 thingies worth pondering at this point in the year.

• The first thingy is water. There isn't any as the video above portrays. That's not good. And it's not just  a Central Valley thingy. This water thingy is running throughout the Ag. and wine industry and will only get worse.
• Second is the heat wave from the past week. Early discussions suggest the heat will reduce expected crop size by 10% plus or minus due to sunburn from the recent record heatwave. A related issue vis-à-vis supply is the size of the world harvest in the Southern Hemisphere.
• Third is rising interest rates. That does all kinds of thingies to the wine business.
• Fourth: the world is shrinking and so is the market share for US produced wine.

What Does the End of QE Mean for Wine?

Everyone likes Fridays. This Friday is a little more special so I decided to post a non-Sunday blog for the first time. Why the deviation? Because Friday is the day we receive the most hours of sunlight in 24 hours .... and then its all downhill after that.

While that sounds a little gloomy phrased up that way, consider that its coming from someone who has been following and predicting the movements in the economy and wine business the past few years. Its been enough to make anyone gloomy especially since I've been consistently right. (Editors note: Please don't wake me and remind me of a forecast that was wrong. Thank you.)

Anyway, something happened yesterday that is making me put on economic sunglasses to protect my eyes: The Fed announced the economy is looking pretty darned good, inflation is in check, and unemployment is coming down to manageable levels. Add to that the US Credit Rating was raised back to AAA about 10 days ago and that is down right exciting right? What did the markets do? The Dow dropped 200+ points and the 10 year Treasury Bill rose 13 basis points. In fact the 10 year, which is the benchmark used for vineyard and acquisition financing has increased about 40 basis points since May. So what gives? If this is good news why is the market off and what does that mean for the wine business?

Why Sell Wine Based on Aroma and Taste?

Selling commodities is difficult because people buy on emotion, or instinct if you will. Want and desire are powerful emotions that can stimulate the release of endorphins. It's why some people are shop-a-holics. It feels good to buy. But it's not that easy to get emotionally worked up about borax, chlorine, and salt. As an economic good, a commodity has no real differentiation, so small price differences in competing products can make huge differences in total sales.

Think about how you won't buy gasoline at one gas station because it's four cents cheaper around the corner. That's a commodity. Ever buy a piece of art that way? Of course not because art's value is in the eye of the beholder, is easily differentiated, and consequently will have wide price ranges. When art is sold, it's sold on the artist's reputation or the emotion the piece evokes for someone. Marketers work overtime to take commodity-like goods and then pretend they aren't commodities by creating and building an emotional appeal around the brand.

Successful Tasting Room Metrics

 

In our second live video broadcast of the year, we focused on the Tasting Room, Wine Clubs and Direct Sales with a panel of industry experts. The entire broadcast was supported by an extensive survey, with over 500 respondents taking part from across the US. The complete results from the survey were returned to the participants. This broadcast included participants from several countries, but primarily North America. Hopefully you were able to tune into the session live from the Silicon Valley Bank studios and participated in the discussion. If you weren't able, above is the YouTube link to the broadcast.

Please log in and comment for the community at the end of the transcript with any of your perspectives and suggestions for the next live broadcast.