What is Normal in a Post COVID-19 World?

The Coronavirus Pandemic for the wine and restaurant industries has been like getting picked up in a tornado and dropped into the Wizzard of Oz movie but without the welcoming committees. It's been dizzying to see overall demand for wine improve, at the same time premium wineries are fighting for survival. 

Crisis Management for Wine Country

I'm not alone when I say that I've never been through anything like this and didn't see it coming. I had no way of imagining such a circumstance: a world-wide pandemic that closes down the US and World economies? While I've seen shelter-in-place orders for regional issues, it's beyond comprehension that this would ever take place in as many countries as we're seeing now, or in the entirety of the State of California and the growing list of other states and regions that have similar orders.

After the string of directives this past week from state, federal and local governments that pounded down our prior realities, I spent time surveying the wine industry landscape and talked to as many people as possible to gain a sense of where we stand. 

Canceled: Annual SVB Direct to Consumer Survey

You probably recognize the photo up top of Times Square. I took it this afternoon from a webcam. You might never again see it this empty - or so that's my hope.

The Decision to Cancel

Selling Wine in a Pandemic

There are times in life when we have to react to circumstances that are well outside of anything expected. A pandemic? Well, that's a circumstance with which none of us have any experience. That new aspect of our lives required us to adapt then employ behaviors that are out of the norm. For some, this is distracting, but for others, this is nothing less than debilitating.

The Annual SVB Direct to Consumer Survey is Open

Improving and evolving your direct sales strategies, marketing, and sales will be the difference between success and struggling in the coming decade as the industry's consumer target evolves under our feet as, anti-alcohol groups push their agenda and competition from beer, spirits, and foreign wine intensify. We defend ourselves by using data and evolving or approach.

For instance, how does your tasting fee compare to your region? Are you enticing consumers or scaring them away with that? Are your tasting rooms sales growing like others in your area? What are the splits between club sales and tasting room sales and are they in-line with comps. There are so many other questions that deserve attention.

Shortcut for those looking for the links: Survey Questions  Take the Survey Now ... otherwise, let me convince you a little more.

The Email You Don't Want to Get

I have a role that puts me in contact with winery owners, analysts, entrepreneurs and occasionally even people with checkmarks next to their Twitter accounts. They run the gamut. I get a couple hundred emails a day - most of them junk but more than enough to have me working 12 hour days to keep up. People are always asking my opinion, and on occasion, they want to give me their opinion.

This week I received an email from a casual acquaintance who is a wine consumer but likes to read the SVB State of the Industry Report and check in every year with me. This year his email was disturbing. Here is what he said almost verbatim. I've changed the region to 'wine country' to make it more general and added emphasis:

Final Call: Sign up for the 2020 SVB Industry Videocast and Report

I finished writing the SVB Annual State of the Industry Report in early December. There are always surprises I discover when going through the research and writing. This year the surprise was the top slide. This slide is from the Annual Industry Survey and it answers a question everyone has: How is the industry feeling about the current market?

In the 2019 report last year, the overall industry sentiment turned barely negative with one percent of the industry on average turning pessimistic. That's news in and of itself in this most optimistic of businesses. But in the 2020 report which will be released this week, a whopping 46 percent of the industry turned pessimistic. Wow! Have conditions turned that bad that fast? 

I think you have to respect the data. But I also believe identifying the risks and threats allows us to best define solutions to fight back and in the videocast on Tuesday, we will talk about some solutions.

Hopefully, you want to hear how we see the industry this year - threats and opportunities. Signing up for the videocast will give you a replay link to watch later, an early link to the report and slides produced and used during the session. [sign up here] 

2020 SVB State of the Industry Report & Videocast

I am looking forward to the release of the Annual State of the Industry Report. I finished writing about 2 weeks ago and now it's going through regulatory, legal, compliance, marketing, production, etc. You can't believe how many people contribute to the production of this.

The report will be released on January 14th. Signing up for the videocast will give you a replay link to watch later, an early link to the report, and slides produced and used during the session.  [sign up here] 

You'll have to wait to hear the conclusions but here is a teaser. 

We asked the question in the SVB survey, "How was your year." It might be surprising to know that sixty-nine percent of the industry believed 2019 was a good year, and 24% said it was their best year ever!

SVB Industry Research: The New Deal

Winning A Battle

The Annual SVB Industry Survey is closed. I've never posted those words on a blog before because that has never been news. But last Friday, because of the lack of industry response, I was convinced this would be SVB's last survey and in another first, I had to let the industry know that.

I interpreted the continuing annual trend of fewer survey responses as the industry making a universal statement that our research wasn't worth spending the 13 minutes it takes on average to complete it. I can't analyze blank cells, so without a response from wineries, I can't write the Annual State of the Industry Report with the same level of analytic support. How else am I to interpret the disastrous survey response?

I knew last Friday if I couldn't get at least 200 more responses in the 4 remaining days of this 3-week survey, there was no sense in continuing, and this was going to be the last survey the bank would produce - and the good news is I would get my November and December holidays back! So the close of the survey has now apparently become news to many people, including my family. How did we end up with responses?

Is this the Last SVB Industry Survey?

Images from Pixabay

I am trying to put the pieces together to arrive at a decision to continue or discontinue the Annual SVB Industry Survey, and I need your help to decide.

Almost 20 years ago I recognized there was a severe lack of good data and benchmarks, so I came up with the idea to start an industry survey. It was a novel concept for the era and was immensely successful. For the first time, small wineries had real business information to help in decision-making.

We gave the complete set of information and analysis to respondents and also used it to formulate pieces of the SVB State of the Industry Report. We've been fully underwriting the effort at substantial cost and producing results free of charge ever since. It has to be a labor of love on our part. I don't think anyone would confuse it with a for-profit initiative! But we are at a crossroads.

The SVB Survey is Now Open

Where are we headed as an industry? By now, everyone should be able to agree we are at an inflection point. We certainly have some obstacles to dodge. What are they? What is the magnitude of the problems? How long will we be dealing with oversupply? Where are the opportunities over the next five years? What should we do? 

We can help with some of those answers by getting you some benchmarks if you [take this year's survey]. 

Wine & Milk in Decline Due to Changing Science

I was intrigued at the above video which chronicles the advent and popularity of plant-based milk products like Almond Milk and at the same time the decline in the consumption of real milk. Milk and wine were both described as a healthy part of a normal diet at one point. So what happened? It's a little bit of Deja Vu.

Get Ready For Cancer Warnings on Wine Labels

Note: There are several links to articles embedded in the post following that give more context.

Deep within the State of the Industry Report that was released in January, I discussed the Cumulative Negative Health Message that is being spread by neo-prohibitionists. That message is resonating with consumers and wine sales are being impacted, particularly among young health-conscious consumers.

In fact, the total volume growth of wine sold through distributors in the US has turned negative in both restaurants and grocery/drug store sales in the 12-month period ending in June of this year. When was the last time that happened?

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.

How Much is Your Winery Worth Today?

Change Creates Opportunity

The 2019 SVB State of the Industry Report helped change the narrative in the wine business this year. While the industry remained focused on premiumization, I had to report in January that the positive elements that created the industry's astounding success over the past 25 years were hitting a wall. We predicted that M&A would slow this year and thus far, that appears to be a good call, notwithstanding the massive sale of about thirty of Constellation's wine brands to Gallo for $1.7BN.

There is plenty of activity still. Probably once a week both buyers and sellers ask me, "what are average winery multiples?" What they are really asking is "how much is my winery worth?" But there is more to the question. They also want some color on the business environment.

As a banker, I love those questions because it means there might be a financing opportunity (...yes I do have a day job making loans, as boring as that might sound.). 

The short answer to the headline question for today is there are still plenty of buyers but overall they are being a little more selective, and your winery and vineyard are probably not worth more than they were last year.

Without going into details on a long topic, we are presently oversupplied with grapes and bulk wine from most regions, and the upside to higher sales is for today - more limited than in the past when the rising tide of higher boomer incomes along with the belief in the health benefits of moderate wine consumption lifted all boats. Today millennial consumers are spirits and beer consumers and are trying to cut their alcohol consumption for health reasons.

There are activities that with certainty will return the growth rate in demand that we've been used to,  but that is another VERY long topic for another day. Buyers believe in the strength of the product and know there is upside given time, expertise, and focus.

As it stands, shrewd buyers and sellers are still finding agreement on price and repurposing valuable assets for tomorrow. Investors with a long view recognize the opportunity this current market change is creating. But with any sale, there has to be an offer, and an answer to the question, "How much is my winery or vineyard worth today?"

Wine Consumption Probably Won't Return to "Normal"

      I Seek The Finest Knights in the Land

We work in the most interesting and wonderful industry on earth. Two things I love about the industry are the infinite palate of interesting souls and the sheer volume of optimists within it. Ours is a happy place; a Camelot of sorts. It's an industry where losing an arm is viewed as just a scratch in some corners of the realm.

I love to be an optimist and predict safe and clear travels when the facts support it. But sometimes a foe might be blocking our path, and we need to take up arms. 

Several years ago when I authored the Annual SVB Wine report, I was quite optimistic and outlined all of the positive influences filling our sails. But this past year I was more gloomy; a Black Knight, and that bothered some of the optimists around me.

Optimism is good but blind optimism, the kind that denies the loss of both arms when they lie on the ground ... that isn't so good. Blind optimism is a poison that keeps us from taking a critical view of important trends and keeps us from committing to timely solutions. 

For my friends who just don't want to hear any of the gloomy facts below (along with some accompanying solutions), we'll call it a draw. You can stop reading and enjoy the next video instead. 

Now Back to reality...

Well then ... according to the BLS Consumer Expenditure Survey, Americans spend about 1% of income on alcohol, no matter the age. One could impute from that statement, we just need to wait until millennials are older and they will spend their 1%. In fact, just waiting is indeed the suggestion I often get from optimists. 

That's a rational view because the millennial generation's median age is 30, and boomers didn't really hit wine hard until their median age was 35. But that statement - spending one percent, is about total alcohol spending, not wine, and young consumers aren't treating wine as kindly as craft spirits and beer these days.

In the State of the Industry Report, we noted that millennials haven't increased their share of premium wine purchasing in four years. They just aren't engaging with wine yet, except on special occasions. But they are drinking craft beer and craft spirits more often.

As it relates to alcohol, there is another trend that bears watching. As the nearby slides show, again from BLS data, the under 25 age group in red is spending less and less of their hard-earned income on any kind of alcohol! That means they are spending it elsewhere.

In the first slide, we can see the percentage of their total income that the group is spending as a declining percentage. In the second slide, we see that they are spending a declining amount of per capita income on alcohol as well. And again, that's an overall statement on alcohol, not just wine alone.

     No Amount of Wine is Good For You

The section title is now a line that's being repeated from politicians across the world and stems from a controversial study. It doesn't matter if it's true. That's what's in the narrative.

The young consumer is being frightened away from beverage alcohol by the hijacking of science and the continuing onslaught of negative press coming from anti-alcohol groups. We covered that in the State of the Industry Report as well and noted the increasing volume and outlandish claims coming from that group. 

Today there is a growing trend toward wellness and that includes abstinence from any form of alcohol. Without any kind of response from the wine community to reference science that shows moderate wine consumption is healthy, we will see the negative trends continue.

We know that the growth of premium wine sales is slowing and total volume growth of wine has turned negative; something else we pointed out in the Annual Wine Report. Off-premise growth is displayed in the graph near this text. Wine is being hurt by the combination of the boomer moving to retirement and the young consumer's current lack of engagement. That's changing wine demand from what we've grown accustomed during the past 20 years of premiumization.

So the question at hand is, with the negative trends we are watching, will wine consumption ever return to our view of "normal?"

You won't like my answer, but don't be surprised if young consumers drink less alcohol tomorrow, and those who do drink continue to embrace craft spirits and beer instead of wine. 

If that statement isn't too gloomy, then you are an open-minded realist and undoubtedly quite attractive as well, so I encourage you to read on.

      Four Reasons Millennials Are Not Good Wine Consumers 

1. Wine is expensive compared to craft beer and spirits. One 750ml bottle of a well-known pinot noir costs $30 and has 5 servings that have to be consumed that evening or it will oxidize. The same size bottle of Makers Mark bourbon can be found for the same price, has 25 servings, and will stay drinkable for months. Another way to look at it: Jon Moramarco computes that on average, wine is $2.15 per five-ounce glass serving, versus $1.28 for a bottle of beer and 0.93 cents per shot of spirits.  Premium spirits are a better value compared to wine - and bartenders know that they get better margins for spirits over premium wine too.  Our frugal millennial consumer knows wine is comparatively more expensive.
2. Millennials are more health-conscious than prior generations. The wine business is being out-marketed by spirits producers who tout health-related features of their products such as low calories, no added sugar, gluten-free, non-GMO, organic, sustainable, etc. Wine? We don't yet put calories on our labels, we stopped promoting the massive body of science showing the health benefits of moderate wine consumption and with the anti-alcohol movement gaining traction in the narrative, even alternative non-alcoholic and engineered alcoholic products are starting to gain favor. The industry reaction? Some wineries are trying to adapt by making non-alc products, and many are trying to find a way to move into cannabis. Our health-conscious millennial consumer is moving away from alcohol as a category.
3. Millennials might not collect wine as did their boomer parents. Millennials are renting more than past generations at a similar time in life, and by all indications aren't expected to have the same degree of homeownership in life. But when they do buy homes, they look for more compact spaces. A premium liquor bar takes up less room than a wine cellar but still supports a family who entertains. Our space-starved millennial consumers probably won't collect wine like their parents.
4. When premium wine took off in 1994, there was no craft beer or craft spirit option. Wine became the choice for boomers because it was the only truly premium product, and I might add, it was a better value in 1994. Today, the typical beverage alcohol consumer drinks across categories - beer, wine, and spirits. Only 7% identify as pure wine consumers today. Our practical millennial consumers are weighing their premium bang for their buck and are finding wine wanting compared to spirits in particular.

Today the landscape is different from the 1990s when boomers drove wine consumption higher. Craft spirits and craft beer are pure substitutes for wine now and both are increasingly paired with meals as the millennials repurpose the use of spirits and craft beer to align with their tastes and budgets. Add to that "gullet-share" losses from non-alcoholic beverages and factor in a future with CBD infused wellness drinks, and there is less room for wine tomorrow - unless we change the game we're playing.

      Wine Drinking Grows with Age. Just be Patient ...

There is no question that beer and spirits have been the entry point into alcoholic beverages as long as most of us remember. And the pattern we're comfortable reciting is that all consumers evolve to wine as they age. That's what the chart nearby is saying about the current state. But consumers haven't always moved from beer and spirits into wine due to age. 

The Mature Generation - the people coming back from WWII as portrayed in Mad Men were beer and spirits drinkers. 

Coming from Prohibition and the Great Recession, the Matures largely bought alcohol beverage with a practical approach of ethanol per dollar - bang for your buck. Wine didn't compete well in that equation because it was lower alcohol and traditionally sold in smaller formats. To compete with spirits, wine became fortified in the '50s or sold in gallon jugs that were mass-produced in order to drive the cost of production down so the price could be dropped and the producer still could cover a profit margin.

That approach worked in the fringes of the adult population in the 50s and 60s, but never really got that generation engaged with wine as their first choice. 

The mature cohort remained more beer and spirits consumers throughout much of their consuming lives. Their rotation to wine started only when the wine industry gave compelling reasons to evolve from beer and spirits. It wasn't age. It was producing a product, marketing, and then selling wine that produced that change. And those consumers were in their 60s and 70s at that point.

The popularization of wine and move from beer and spirits really happened in the 90s with boomers who broke away from their parent's traditions and moved to premium wine after starting in cheap spirits and beer. The lesson is that offspring don't always follow the path of their parents.

To be successful, we need to give the young consumer more compelling reasons to be wine consumers. Hoping they will grow into wine isn't a good choice. As I say often, "Hope is not a strategy."

If we don't evolve the way we sell and market wine, we very well might suffer the same result the Mature generation took, and see young consumers staying with spirits and beer as their preferred choice for beverage alcohol. But there are things we can do to avoid that outcome.

     What's are some Solutions to the Gloomy Trends?

For wine producers, I don't believe scurrying off to non-alcohol and cannabis-infused drinks as some are doing, or coming up with the next pink RTD wine cocktail are the right approaches. We should stay focused on our strengths. But we need an on-ramp for the new consumer which means we have to evolve our marketing. 

We have to find the price, product, packaging, promotion, experience, quality, and any other "P" we can think of, and begin engaging with the young consumer now. We can't "wait until they can afford wine" because the rest of the beverage alcohol industry is already changing their games to take advantage of the current trends. We are being out-flanked and the game is time-sensitive.

The first and easiest thing to do is to beg our Marketing, AVA, and Industry Associations to keep the valid moderate-consumption research at their fingertips and/or fund positions that give credible journalists and law-makers the other side of the anti-alcohol stories that are flooding the press. 

The Wine Institute used to have a full-time technical position that did just that, but the position within has been vacant for more than a decade. It ended when wine consumption started to soar and the message of health was embedded into the narrative. I've asked several in the Board of Directors to consider that and I know I've been heard, but we should all ask that the position be reinstituted and be willing to pay for it. And we should all look to other industry associations to do the same.

The second thing we need to do is evolve the way we talk about wine. This is the first time in American retail history that there are two very large cohorts at opposite ends of their buying lives - and each has different values and financial capacity. The categories doing the best in retail today are those who figure out how to increase demand from both cohorts.

I appreciate the spirit of those who say "we need to stop making wine so complex," but I disagree because the dominant buyers of wine are still people who have appreciated the way wine has been marketed. We have to keep the older consumers and market the way they prefer BUT AT THE SAME TIME, adapt to the new consumer, giving them products, and the positioning that appeals to them. That's not easy, but we aren't really trying. The spirits industry is trying, and they have the best growth rates in all of beverage alcohol. 

While wellness is a trend, inauthentic wellness claims will, in the end, backfire as snake oil. We're starting to see some of that with the recent LeCroix litigation which has cut their stock value in half.  But of all the alc. beverage categories, wine is unique. It's about as simple as it could be. It has the best science around health. It is often grown from sustainable or biodynamic farming. If we put the ingredients on the back of a bottle it would say something like, 'this wine is made from sustainably grown winegrapes with small amounts of naturally occurring and added sulfites. Nothing else.' 

Optimistically speaking, I believe the wine industry always has responded to a challenge when it's made clear. I believe we have the opportunity to recast the way we sell and market wine and see double-digit growth rates again. We may indeed see wine sales return to what we are used to if we take action ... Or did you stop at the Sesame Street Video?

What's Your Opinion?

• Should we just wait another five years and hope the millennial will move to wine? 
• What are you doing to evolve your marketing (all the "Ps")?
• How are you retaining the best of your message for the existing customers, and still engaging with the newer consumer?
• Will you do your part and ask your Industry Associations to please get technical people in place who can respond to journalists and legislators seeking the other side of the story?

Please join this site on the top right-hand side of the page, and offer your thoughts below. I respond to everyone.



Please share this post on your favorite social media platform. We need to heighten the discussion of this topic.

Sincerely,
Rob "Doom & Gloom" McMillan

Mid-Year State of the Wine Industry Video Update

In early May, I was interviewed by Latife Hayson on the 2019 State of the Industry Report from Napa California. The interview format allowed me to wander into many other topics and updates not covered in the original SVB Wine Report , the January panels presenting the SVB State of the Industry Videocast nor the Followup Q&A Videocast. 

I was able to take large subjects in a quick-hit format which I really enjoy. It also gave me a little time to talk about the marketing opportunities we have in the family wine community that can effectively increase sales.

Annual SVB/WBM Direct Consumer Sales Videocast

      Lots of Shades and Few Patterns

When I wrote the business plan for Silicon Valley Bank's entrance to the wine industry in 1992, I did so largely from a researchers perspective, as I had only modest prior industry experience, and by the time I authored the plan, the industry had completely changed.

I discovered in the process that there were conflicting industry opinions from many of the experts and little research available to support those opinions. The research that was being done was being created by researchers in Chicago and New York; far from wine country. There was almost almost zero street-level intelligence, with the exception of the work done by Motto Kryla and Fisher and Gomberg, Fredrikson & Associates.

As an analyst back then, deciphering the wine business was like trying to see patterns in the lead picture: Plenty of pop and thousands of brands, all trying to find their way in a crowded landscape. Every winery's nozzle was aimed in different directions - region, varietal, wine style, consumer, path to market, consumer segment - because strategy was too often supported by guess work.

That induced me to research and produce my own information for our customers - and the wine community as a whole. The upcoming videocast: Insights for Successful Consumer Wine sales is one such example. --> [signup here] <-- 

      What's the Greatest Risk Today?

The wine business is far more complex than people think. It's a maze of complexities with different models, varying paths to the consumer, pressure from federal, local, and state regulations, a lack of good information, controlling power in a small numbers of hands and changing consumer demand. Oftentime decisions are made with the love of the product in mind, versus a business decision being made with financial returns in mind.

Perhaps the greatest risk we should all be most worried about is our tendency to continue on on a path that's successful. If it works, we keep riding the trend as far as we can, until the strategy fails. In an industry that takes 5 years to get a fully mature yield, shouldn't we be making decisions with a view to meeting the future instead of reacting to the present? Where will things be in 5 years? I guarantee the industry 5 years from now will look very different than it does right now, so the strategies that are starting to wobble today, will be on life support five years from today.

With that in mind and the new SVB DtC Survey now complete, there are many things we'd like to bring out and discuss, including current insights from the survey as well as marketing solutions to consider. This is a time where we need people to grasp the issues, and participate in the evolution of the business and consumer. Getting out ahead of this evolution is where you will find opportunity for growth. 

      Understanding is the Beginning of Change

What are some of the changes we are seeing in this year's survey?

There are more tasting rooms being opened today versus wineries, as a result of the shift to direct to consumer sales, but since 2013, there are fewer of both being opened.

Tasting fees which have been increasing for years are now leveling off; a sign that tasting fees have reached the point where they may be discouraging good/new customers.

After years of seeing increases in by-appointment tastings, the percentage of pure by-appointment has dropped in favor of a mixed model, accepting both walk-in and those with appointments, with respondents suggesting the mix of tastings is also going more of a blend of formal and casual, reflecting consumers with split preferences - some preferring casual and others formal.

  Live Direct to Consumer Videocast

I hope that's enough of a teaser to get you to sign up for the annual SVB/Wine Business Monthly Live Videocast, where we will offer more dialogue on many new findings, along with a lively discussion of solutions and strategy.

In addition to myself and Cyril Penn, included as new guests this year are Tammy Boatright; a person with more than 20 years in direct marketing and winery management and Lisa Kislak with decades of experience in white table cloth restaurants applying data to drive marketing decisions.

Please [register] for this year's live telecast which will take place May 22nd at 9:30 Pacific Time. Joining live gets you into the chat room where you can ask questions of the panel, and discuss with wine people from across the globe. 

Even if you can't make this time, registering will get you the link to the videocast replay when that's available.

This year's panel will include:

        Tammy Boatright - President, VingDirect

        Lisa Kislak - Chief Marketing Officer of Crimson Wine Group

        Cyril Penn, Editor in Chief, Wine Business Monthly.

Date:   May 22nd, 2019

Time:  9:30 am - 10:30 AM Pacific Time

I Can't Take the Lunacy!

This might be the shortest blog I've ever penned, but I've got to get this off my chest.

In the 2019 SVB State of the Industry Report I pointed out some changes we as a wine industry are facing, including the lack of engagement by our younger consumers which I attribute in part to the cumulative negative health messaging coming from neo-prohibitionists.

Annual Direct to Consumer Survey Closes this Week

Every year SVB and Wine Business Monthly collaborate on a survey that maps out the changes in direct to consumer wine sales - providing benchmarks to respondents that are invaluable in day to day business, and equally important as we chart new paths and channels to sell wine.

The 2019 survey closes this week. Join the hundreds and hundreds of wineries who have already taken the survey this year [Take the Survey]

Take the above chart for instance which was a product of last year's survey. In it, we can see that for the first time, there are more tasting rooms being built than wineries. Why? Because wineries all believe they need a tasting room to sell direct. But is that true? The answer is that not all tasting rooms are necessary, but client experience is necessary even if there isn't a tasting room