For 2018, Rob McMillan, senior vp, Silicon Valley Bank and founder of the bank’s wine division, writes in the bank’s just-released and highly anticipated annual review and forecast of the wine industry, sales will rise 2% to 4% while volume inches up just 1%.
Premium wine’s sales growth will be in the 4% to 8% range, down from 10% to 14% last year. Premiumization is still the dominant trend, but volume is leveling out, especially among lower-priced generics. But, McMillan notes, even premium wine growth is slowing.
And it’s increasingly difficult to pass winery cost increases along to consumers.
The past two decades have been a great time to be a winery owner, which growth on an almost straight path with only moderate flattenings during a recession.
But that’s coming to an end, McMillan warns, and successful wineries 10 years from now will have adapted to a customer who uses the internet in complex and interactive ways, is frugal, has less discretionary income that their predecessors.
To be successful in the future, McMillan warns, wineries will have to stop relying on the winery locations as the sole source of sales and find other ways to deliver the experience and wine to consumers where they live.
For this year, California’s winegrape crust will be only slightly higher than in 2017, Oregon harvest yields will set a record, and yields will moderate slightly in Washington State.
Supply is balanced, he says, with particularly strong demand for chardonnay. Cabernet is balanced, but faces flat to downward press at the high end.
Gen X will surpass baby boomers to be the largest fine wine consumer demographic in just about three years. In just three more years – by 2026 – Millennials will leave Gen Xers in the dust, becoming the largest fine wine-consuming cohort.
In a low-growth, low inflation environment, the routine increases in volume and price that wineries have enjoyed will be a thing of the past.
Citing a Bain study, McMillian says the store is no longer the defining characteristic of the luxury buyer. That’s why single brand stores are struggling. Another reason: The U.S. consumer – young and old – is focused on experience and value.
And that means that the supposed willingness of the consumer to trade up, to spend more on average, has a lot to do with a decline in demand for lower-priced wines.
One of the problems facing U.S. wineries is the abundance of good-value imports hitting domestic shelves.
Imports are a threat, McMillan says, and if domestic wine starts losing value in the consumer’s mind, the big wine companies have foreign supply to bring into the equation, which will add further pressure on the smaller fine wine producers.
As for restaurant sales, McMillan notes that frugal younger consumers don’t want to pay restaurant wine markups, and retiring boomers are slowing both their spending and their alcohol consumption volume.
“Young consumers know they can buy a bottle of wine at a store for less, so in the restaurant they are more likely to start with a craft beer or cocktail, and have a glass of wine with dinner,” he writes.
McMillan sees the three-liter premium box wine and Tetra Pak formats continuing to grow, with cabernet, chardonnay and pinot grigio each responsible for more than 20% of varietal growth. He dismisses canned wine as likely to be just “a footnote in sales results.”