California wine business awaits return of younger adult consumers in restaurants, bars

While ultrapremium and luxury wines overall are enjoying better sales growth than low-priced wines, industry analysts are watching for signs that inflation will hurt purchases by two key markets: younger adults and fine-dining establishments hard hit by the pandemic.

“At the premium side north of $15 (a bottle), growth trends are pretty good for wine. Underneath that, especially under $12, they’re not very good, and that’s bulk of the volume, differing by supplier and region,” said Danny Brager, managing director for category and consumer insights at Napa-based industry advisory firm Azur Associates. “Two years ago, the lower end was actually quite, quite good because people were pantry loading.”

That split between high end and low end also holds for sparkling wine.

As the economy continues to recover from the pandemic restrictions and consumer wariness, that gap between the two ends of the wine business spectrum is expected to narrow further, Brager said.

While wine sales directly to consumers continues to be strong, though moderated from early in the pandemic, wines sold through wholesalers mostly in the lower price tiers is facing fierce competition from spirits and craft brew alternatives such as hard teas, seltzers and kombucha, he said.

That drag on sales for lower-end wines is reflected in the overall outlook for growth this year.

Sales of U.S. wines are expected to be up only 1% to 2% this year, and imports down 5% largely because of low inventories after pantry stuffing of flavored wines from Mexico and Canada, according to government data analyzed by Jon Moramarco, managing partner of beverage alcohol industry analytics firm BW 166 in Santa Rosa.

Spirits sales in the U.S. are on track to be up 1% this year, but that’s expected to increase post-pandemic as younger consumers have been reaching for spirits more than wine, Moramarco said.

“Wine from 1993 though 2016 was growing at about 3.5%, and now we’ll be in the 1% to 2% range for the next three to four years, and spirits are likely to be in the 3% to 4% range,” he said.

The faster recovery of on-premises sales of spirits in the pandemic compared with wine is partly why that key sales channel for higher-end brands hasn’t fully bounced back to 2019 levels, Brager said.

“One segment that was hurt the worst was fine dining,” he said. “Wine and fine dining go together more than beer and fine dining. Wine in the on premise is struggling.”

Spirits share of on-premises sales volume has bounced back to 16% from 18% pre-COVID, while wine has recovered to 11.2% share from 14% before, Brager noted, citing data from SipSource.

Vintners also are facing rapidly rising costs for labor and materials, namely glass packaging. Producers such as The Duckhorn Portfolio have warned that such pressures could result in price increases this spring.

“I hear lot of talk of wineries wanting to raise price, given inflationary pressure,” Moramarco said. “I’ve not seen it in the numbers.”

While overall prices of goods rose in the U.S. at an annual rate of 8.5% in March, what consumers were paying for food away from home went up 6.9% and food at home 10%, Brager noted from federal data. But any price increases for beverage alcohol hasn’t hit the shelves yet, as beer was up 4.1%, wine 2% and spirits 1.5%.

Looking at NielsenIQ beverage brand store scan data, Brager saw that the top 1,500 wine brands had pricing up an average of 2.5% over 12 months, and sparkling wine was up nearly 10%, driven by higher-end Champagne brands. Napa County’s top 100 wines were up only 2.6%.

Brager will be looking to see if April inflation figures out the second week of May show any faster movement in wine prices at the store.

Price increases and cost cutting are approaches vintners have taken historically, Moramarco said.

In previous recessions and economic doldrums, cost-sensitive California vintners have moved grape and wine sourcing from coastal California appellations to lower-cost, higher-volume regions such as Lodi, he said.

But how much producers will be able to lean on supply from Lodi this year will be better known in the next few months, he said, as the impact of the hard frost this past winter is seen on estimated crop size.

Jeff Quackenbush covers wine, construction and real estate. Before coming to the Business Journal in 1999, he wrote for Bay City News Service in San Francisco. Reach him at jquackenbush@busjrnl.com or 707-521-4256.