From The Vineyard: Is Reality Hitting the Wine Business?

An economic recovery from the 2008 great recession continued through the Obama Administration, and though some signs continue strong, there are increasing signs of a slowdown ahead.  This extends to the wine business, even though wine companies have been crowing about its “premiumization” for the last few years.

Premiumization is consumers buying more expensive wines.  Sales of low-end wines like “Two Buck (now Three Buck) Chuck” have slowed and the fastest-growing categories are in the teens.  But after a spurt, expensive wines—those over $40 to $50– are becoming more and more challenging to sell.

Yet wine companies raise prices and introduce more expensive wines as costs rise, while young consumers flock to spirits and craft beers.

Recently, the wine business has been abuzz with a newsletter from Rob McMillan of Silicon Valley Bank, the top popular banker to boutique wine brands in spite of its name.

McMillan flatly states, “Winter is coming.  While premiumization is in full force and the wine business is still growing, today we are at a tipping point.  The growth rate in premium wine is decelerating and has been since late 2015.”

He emphasizes that wine sales aren’t declining, but rather the growth we’ve seen in premium wine for a long time is slowing.  He estimates that if present trends continue, wine sales will be flat by mid-2018 to early 2019.

McMillan adds other relevant trends:

The craft beer growth is declining.

Sales of wine in restaurants are collapsing (partly due to restaurants charging such high mark ups, I suspect).

Many consumer and mass luxury companies are suffering from Amazon’s impact, and retailers are hurting nearly everywhere.

The grape market is slowing even for Napa Cabernet, due to high prices.  Wineries don’t expect strong sales.

High-end spirits topped out in late 2015.

US auto sales have been lower every month in 2017, after seven straight years of increases.

More than one winery owner has told McMillan that sales of wines over $75 have been more difficult this year, but it depends on the strength of the brand.

McMillan’s conclusion is that we’re entering a long-term down phase that will impact grape prices, land prices, wine sales, winery and vineyard sales and even success in general.

We should note that McMillan speaks mostly to and for successful boutique wineries, say those that sell 50,000 cases per year.

He doesn’t finance the big guys.  Gallo (75 million cases), The Wine Group (Franzia) (57 million), and Constellation (51 million) supply two-thirds of California’s wine, and they and Trinchero (Sutter Home and Menage a Trois), Treasury, Delicato (Bota Box), Jackson Family and Ste. Michelle have been aggressively buying wineries, brands, vineyards and winery production facilities as the market concentrates.

These bigger companies are likely to supply more and more of the wine, including the more expensive wines, not just the cheaper stuff.  That doesn’t mean worse wine; it just means different suppliers will be prospering.  Fortunately, hopeful new entrants keep coming along, so consumers are likely to continue to have lots of choices.  Perhaps we’ll even see a softening of prices as competition tightens.

Paul Franson lives in Napa Valley, CA.