Silicon Valley Bank wine business forecast warns of slowing sales growth
Sales of premium wine will continue to grow in 2018, but producers in premium regions such as the California North Coast had better up their marketing game to reach younger consumers amid signs that the U.S. market for fine wine and other luxury goods is changing, a closely followed industry analyst told a gathering of winegrape growers in Santa Rosa on Thursday.
In a preview of his annual State of the Wine Industry Report sprinkled with sobering snapshots of consumer behavior, Silicon Valley Bank executive Rob McMillan reminded the couple of hundred listening that sales of higher-end wine — over $20 a bottle — do continue to climb.
"I think 2018 is going to be a great year," said McMillan, founder of the bank's Napa Valley-based Premium Wine Division. He was the keynote speaker at Sonoma County Winegrowers's annual meeting, the 27th annual Dollars & Sense Seminar and Trade Show, held at the Luther Burbank Center for the Arts.
His 2018 projection of average sales growth is 4 percent to 8 percent for premium wine and 2 percent–4 percent for U.S. wine overall. Strong segments of wine sales in the past year, according to Nielsen product-scanning data, is under $10, over $20 and, especially, $15–$20, but volume of wine sold isn't growing much, McMillan noted.
Some say that scan data isn't telling the whole story about wine sales, because major sales channels such as Costco Wholesale, aren't included. He pointed to the latest California warehouse-shipment data for January 2013 through September 2017 from Sonoma County-based BW166 that shows a flattening of shipment volume in the past 12 months moving into U.S. distribution.
"Slowing growth should concern you," he said.
There has been a general downward trend in annual growth rates for fine-wine sales since 2000, McMillan said. And growth nearly halted for the first nine months of 2017 — up just 0.3 percent from 2016, based on financial research on hundreds of the institution's winery clients.
CHANGING CONSUMER DEMAND
"I have not seen that kind of sales growth since 1993 or the Great Recession," McMillan said. By comparison, growth for that peer group was 9.8 percent for the first three quarters of 2016.
1993 was just after an economic recession and before a boom period that ran through early 2001. Fatter wallets and publicity over the "French paradox" helped fuel the quick rise in sales and production of higher-priced wine in the U.S., much of it coming from California, particularly its North Coast. Sales of the bank's financial-analysis peer group only have shrunk once since 2000, by 3.8 percent in 2009.
Estimated sales growth for the bank's fine-wine peer group for all of 2017 was still positive: 4.0 percent.
"Which is pretty weak for fine wine," McMillan said. That's down from 9.6 percent for all of 2016, 19.8 percent in 2010 coming out of the Great Recession and 7.7 percent–12.2 percent in the intervening years.
This flattening of demand likely will show up in slower growth for pricing of North Coast winegrapes and vineyards in premium areas, McMillan said.
"Consumer demand is changing, and getting out ahead of it is important," McMillan said.
Spending on luxury goods continues to growth worldwide, buoyed by central bank–stimulated economic growth in countries and regions that are prime fine-foods markets, such as Europe, Japan and China, McMillan noted. But sales growth on higher-end products seems to be lagging in the U.S.
Some have attributed this to the "Amazon effect" of consumer preference for shopping online over at brick-and-mortar stores. McMillan pointed to Zappos as an online retailer that has tried to crack the challenging code of selling luxury online.
But it's a goal more sellers of fine goods need to embrace quickly, as about 20 percent of luxury sales are projected to shift to the internet by 2021, he said. And that's a share of sales some luxury-goods sectors such as apparel already have reached.
Granted, shipping rather lightweight, durable goods like shoes and handbags is less challenging and costly than heavy, delicate and perishable products such as sought-after wines. But only about 3 percent of fine wine is sold online now, McMillan said.
Another potential contributor to lagging luxury-goods sales in the U.S. is what McMillan calls the "indulgence gap." Millennials say they want to buy fine products, but their incomes haven't risen to the point of being able to do so. Their buying power has been hindered further by ever-larger student loan debt.
But this gap may be closing, McMillan said. Younger consumers are moving up in the value of their purchases, while baby boomers are scaling back their purchases as they reach retirement.
Vintners may be able to get in front of what appears to be a consumer shift by addressing the direct-to-consumer sales strategy, McMillan said. Sixty-two percent of sales among his bank's premium winery clients are from direct sales, but only about 3 percent is sold online.
"We've bastardized the wine experience that it can only be had at the winery," McMillan said.
The focus has been on tasting rooms, hospitality experiences and clubs, but those subsets of the direct-sales channel have considerable acquisition costs and club churn, he said. Oregon has been the growth area for tasting room openings, while such venues have not seen growth elsewhere on the West Coast.
The onsite focus, while important for boomer and Generation X consumers, also is leaving out younger consumers and many outside California, McMillan said. While vintners can "cherish" the older consumers, who pay dozens of dollars each for tasting experiences, they should also develop a "digital backdoor" for younger consumers looking for a "life hack" such as an online tasting coupon.
"You have to work on this now, because in five years there will be a change in the way we look at the business," McMillan said.
Silicon Valley Bank will be presenting more details from the annual industry report during a webcast Jan. 17 and releasing the full report sometime in February.