But while wine’s advertising spending is stunningly low, advertising may not be the entire solution, Rob McMillan, senior vp, Silicon Valley Bank, said in a podcast introducing the 2022 edition of SVB’s 62-oage “State of the U.S. Wine Industry” report. McMillan thinks restaurants are vastly overcharging for wine and that consumers will choose other alcoholic beverage choices that are less expensive. “Restaurants will find wine is not in demand at the prices charged, and that maintaining deep stocks of wine isn’t worth the cost,” he says.
A look at premium wine’s long-term growth trend has shown a steady decline from 28% during to tech bubble to 22.3% at the start of the Great Recession to -0.06% in 2020. Last year sales jumped 21%, the highest level in 13 years. But don’t expect that to be the start of a turnaround for wine. McMillan notes that wine has a 20% higher mindshare for those who are 65 or order. “In 10 years, as 65 becomes 75, they will be replaced with consumers who aren’t wine lovers,” McMillan warns. That’s not good news.
Nor is what happened after reopening from Covid. In September 2020 on- and off-premise depletions for spirits stood at 5.3%, and for wine at 1%. In the last three months, after reopening, spirits depletions rose 6.1% while wine depletions fell 6.9%.
Now, despite all this, McMillan says 2021 was a good year for the wine industry, which benefited from reopened tasting rooms, hotels and restaurants. Direct-to-consumer sales grew and internet sales remained strong. Some 30% of winery owners said 2021 was their best year ever.
That success, especially for premium wine, isn’t going to last, McMillan predicts. At least it won’t last in terms of volume. Within three years, he says, “declining sales by volume will be accepted as reality by all analysts.” Inflation will lead to small price increases this year, and when the Federal Reserve begins to raise interest rates, demand will slow for high-end vineyards and wineries.
We’ve known for years that people generally don’t want to drink what their fathers drank. That helped beer and hurt spirits beginning in 1961, but after 20 years — as those who came of age in World War II came of age — wine enjoyed growth But beginning in 2008, spirits has been slowly and consistently gained share from both wine and beer.
“The large breweries sowed the seeds of their own struggles when they focused too much on scale and increased efficiencies throughout the 1970s. Once they recognized that the consumer base had changed, they tinkered with product formulas and began an intense marketing and advertising campaign featuring famous sports figures,” McMillan says. That was mistake No. 1.
Mistake No. 2 for the brewers was an ever-more blander and mass-produced product that opened the door to the craft brewing surge. The big brewers thought light beer was the answer. The result: today craft beer represents 12.7% of the U.S. beer market by volume and 23% by revenue.
Next the beer giants brewed up some acquisitions, some of which have been successful and some of which, McMillan says, “have been colossal failures.
The lesson in this is that consolidation may give the acquirer more pricing power, but it doesn’t necessarily meet the consumer’s needs, and misjudging consumer desire may lead to continuing declines to the point that plants no longer function effectively.
What makes all this especially bad, McMillan suggests, is that industry leaders often “ compete for share when growth stops or declines rather than bringing new consumers into the category through cooperative promotion.”
Instead of marketing to bring new consumers to the category, beer leaders sought to compete against each other. One of the worst cases began in Super Bowl LII when Bud Light slammed Miller LIte and Coors Light for using corn syruo in brewing.
It deja vu all over again, this time in the wine industry where a few are claiming they are “natural” or “clean” and better than the rest of the industry. And just as happened with brewers, large wineries are pushing scale and probing for the right combination of volume and price, jacking up price as much as possible.
We’ll look at how wine is repeating beer’s mistakes tomorrow.
