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Amid shift in wine consumer demand, California Wine Country cautioned to prepare for ample grape supply

U.S. wine sales continue the mostly upward trajectory of the past 27 years, but 2019 has begun with fresh warnings for the fine-wine business over the next few years.

First came cautions about how premium wine (over $10 a bottle) is marketed to younger generations of wine consumers, particularly when the pace of adoption of wine by millennials isn’t happening as rapidly as hoped to replace baby boomer downscaling in retirement. Then came observations about slowing enthusiasm among vintners to buy all the fruit and wine from the North Coast.

Millennials (ages 22–37) have been talked up for more than a decade as becoming the next big group of consumers of premium wine (over $10 a bottle), but they’re not reaching for finer wine in as large of numbers as anticipated, according to Silicon Valley Bank’s State of the Wine Industry report, released Jan. 16. And the smaller Generation X (ages 54–72) appears better poised to become the top buyers of higher-priced wines for several years, it said.

The report, now in its 18th year, is produced mainly by Rob McMillan, founder of the bank’s Napa-based premium wine division. The bank is forecasting premium-wine sales dollar growth to be 4 to 8 percent this year, on par with last year’s forecast. Sales growth averaged nearly 6 percent for the first nine months of last year, based on analysis of client financials. And strong year-end sales may be higher, McMillan wrote.

“In my view, the issue of greatest concern for the wine business today is the millennial generation’s lack of participation in the premium wine category,” McMillan wrote in the 57-page report.

Millennials last year consumed 17 percent of fine wine last year, staying around 15 percent of an average winery’s sales for four years, according to the bank’s annual survey of producers.

While millennials have been driving the craft beer and craft spirits movement in the premiumization across adult beverages, they are held back by an “indulgence gap” of slower starts to their top income-generating arcs than boomers and Gen Xers, McMillan wrote. That gap is projected to delay millennials’ peak earning to reach their luxury aspirations for five to 10 years, potentially becoming the top fine wine consumption group by 2027.

Meanwhile, Gen X is the smallest in number of the four wine consumer age groups (including matures, over age 73), but Gen Xers have hit their career stride as a group, representing 34 percent of fine-wine sales and rising. They are expected to pass boomers, currently 41 percent of sales, in three years, the report said.

The bank’s report echoes research conducted worldwide by London-based Wine Intelligence. Last year, 21 percent of U.S. wine drinkers who imbibe regularly were over 65 years old, compared with 16 percent in 2015, according to Lulie Halsted, CEO of the firm. But the ranks of regular wine consumers at the front end - ages 21-24 - are decreasing, down to 6.5 million in mid-2018 from 7.5 million three years earlier.

“We’re proportionally losing some wine drinkers,” Halsted said at the 28th Sonoma County Winegrowers Dollars & Sense seminar on Jan. 17. She called this “millennial retreat” one of eight trends pressing on future wine sales.

Two reasons Halsted suggested are lower levels over the past three years in wine knowledge and confidence.

As McMillan noted from data compiled by the Gomberg-Fredrikson Report, shipments from California warehouses started ebbing in 2016, and imports to the U.S. of bulk wine were down 14 percent.

Sales of wines retailing for $11 to over $25 a bottle grew at 4.1 to 9.2 percent in the 52 weeks ending Dec. 1, according to Nielsen figures presented by Glenn Proctor, partner of Novato-based Ciatti Co., to the Sonoma County grower group. However, wineries secured grape contracts in 2015–2016 based on expectation of 10 to 15 percent annual growth, bulk-wine and grape broker, he said.

“We were seeing a decline in demand,” Proctor said. “That was before we were talking about millennials and demographics.”

The slackening of demand for grapes and excess wine appeared in force last year, he said. Then a combination of newly matured grapevine acreage and even growing seasons brought bountiful harvests, including what’s thought to be a record-breaker for California and, perhaps, Sonoma County. The first official tally is set for release in early February, barring delays because of the federal government shutdown.

Statewide tonnage is projected to be 4.4 million–4.5 million for 2018, topping the 2013 record, and Sonoma tonnage is figured to be 252,000 tons, a high point since 2014 but below the 270,000 tons of 2012.

The 2018 Sonoma County cabernet sauvignon haul is projected to have been 47,000–55,000 tons, perhaps the biggest crop for the variety in Sonoma County, and the crop for pinot noir is thought to have been of equal size, also pushing records.

So a big crop came at a time of high grape prices and potentially slower retail sales growth. “It’s not surprising that there’s hesitancy in the market,” Proctor said.

From the grape seller’s market of 2016 and early 2017, wineries weren’t out looking to put grapes into longer-term contracts last year. Today, grape buyers are looking at a market headed toward oversupply, Proctor said. What is making the buyer pool for Sonoma County grapes more challenging is the run-up in pricing in the past several years had more vintners shifting brands to lower-cost appellations outside Sonoma County, and wineries are now looking for buyers of excess grapes they have contracted to purchase.

“It’s a new market,” Proctor said. “It’s a new reality.”

Vintners he talked to say they are looking to buy fewer tons of the major Sonoma County varieties this season and about the same volume of cab, but they expect to produce more cases of wine. They expect prices for 2019 cab, pinot noir and zinfandel will decline. Proctor thinks vintners will be looking to cancel purchase contracts, so they can buy more grapes on the spot market, or will be renegotiating prices.

“We have been through this before,” Proctor said. Solutions for these kinds of market conditions include seeking out producers of Sonoma County appellation brands to form long-term relationships, managing costs related to farming and adjusting assets through methods such as replanting older, lower-yield vineyards.

Another speaker at the Sonoma County Winegrowers seminar was Eric Hemer, senior vice president and director of wine education for Southern Glazier’s Wine and Spirits of America Sales, one of the country’s largest adult-beverage wholesalers. He noted that the company for the 12 months ending Dec. 17 sold 3.9 million cases of wine with the Sonoma County appellation on the label, about the same amount as a year before.

Jeff Quackenbush covers wine, construction and real estate. Contact him at jquackenbush@busjrnl.com or 707-521-4256.

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