The wine industry will improve slowly and steadily in 2013, with sales growth ranging from 4 to 8 percent — albeit a lower rate of growth than in the previous three years — according to a new report from Silicon Valley Bank.
The wine market will recover, said Rob McMillan, founder of Silicon Valley Bank’s wine division based in St. Helena, and author of the report. But “it won’t recover like it did before.”
“It’s another good-news, bad-news year in fine wine,” McMillan said. “While we are quite optimistic about the future prospects in the U.S. wine business, a combination of events will continue to hold back robust growth in 2013.”
Economic uncertainty, slowing gross domestic product, lack of economic leadership worldwide, aging baby boomers and “a heavy 2012 harvest provide headwinds against forecasting higher growth,” McMillan said.
Forces helping consumer demand start with improved hiring and better housing markets, “which are critical to accelerating aspiring and mass affluent consumer purchases,” according to McMillan. “The first half of 2013 will prove more difficult than most expect, but the back half of the year should see improvement.”
In a survey of 450 West Coast wineries, McMillan said that the fine wine segment is “early in a long-term, steady growth phase, despite increasing pricing pressures and global economic uncertainty.”
In a panel discussion on Tuesday, McMillan noted that with more baby boomers retiring, and subsequently spending less, it’s up to the age groups that follow to make up the difference, particularly the demographic known as “millennials”: those born from the early 1980s to the early 2000s.
“That is the future,” he said.
Wineries are seeing millennials in tasting rooms in greater numbers, noted panelist Mary Jo Dale, chief consumer direct officer at KLH Consulting in Santa Rosa.
“They are interested in wine,” she said. Their spending power is not the same as baby boomers’, but that will force wineries to shift how they sell to customers moving forward, Dale said.
To reach those new buyers, wineries will need to embrace new sales channels, most notably direct-to-consumer sales. Direct-to-consumer sales will continue as the largest growth channel for most wineries, the report said.
The old paradigm of relying on a consumer to visit a winery tasting room “is not enough” anymore, said panelist Paul Mabray, chief strategy officer of VinTank, a wine technology consulting company. Wineries must use new channels to reach consumers, including direct-to-consumer sales, consolidating wine clubs and even using Amazon and Facebook to sell, he said.
Wineries today “have to be totally vertically integrated,” said panelist and appraiser Tony Correia of Correia-Xavier, Inc. of Fresno. “They have to grow, make the wine, distribute it and sell it to consumers.”
“The power shift to the consumer is huge,” Dale said. And it’s not just the wine industry that’s grappling with those changes. “A lot of industries are having a hard time with it,” she said.
While wine businesses expect to increase bottle prices slightly, Silicon Valley Bank believes “that will prove difficult in 2013,” McMillan said.
“We don’t think that the wineries will be able to increase prices like they have in the past,” said McMillan. Larger wineries or “cultish” brands might be able to raise prices a little higher, but those selling bottles in the $20 to $30 range won’t be as successful.
Mergers and acquisitions of vineyards and wineries will continue at a record pace in 2013, said the report. But replanting of vineyards is crucial, Correia said.
“In the last decade we have not been planting enough to replace our inventory. We don’t have enough vineyards in the ground,” Correia cautioned.
The report also noted that winery gross and net profit “will be negatively impacted in 2013 due to higher grape costs.”
Planting in grapegrowing regions will continue to be more restrained versus prior cycles, the report said. The purchase volume of wine grapes and grape pricing “will largely be flat compared to 2012 and massive bulk imports will continue to dominate the lowest-price-point wine categories.”