Report: Premium wineries enjoy sales growth but should beware looming ‘demand problem’
While the premium end of the U.S. wine business continues to enjoy robust though slowing revenue growth, the industry overall has a serious “demand problem” across a wide swath of consumers that could eventually become a problem for upper-end wineries, according to a report released Wednesday.
Revenue growth for premium wineries such as those on the North Coast is forecast to be 4%–6% this year, down slightly from what they are estimated to have taken in for 2022, according to Silicon Valley Bank’s annual State of the Wine Industry report.
Sales revenue growth for the first nine months of 2022 was 9.6% ahead of all of 2021. But that is half the growth pace in the first three quarters of 2021 (18.2%), a rebound year from the discount-heavy first year of COVID.
That analysis of 2022 winery performance and 2023 projections comes from the bank’s peer-group comparison of winery financial statements from almost 200 mostly West Coast vintners, including those in Sonoma, Napa and surrounding counties.
They ranged in production scale from 1,000 to 2.3 million cases annually, with median production of 18,000 cases. Median bottle price was $28.
For the U.S. wine business overall, the volume of wine sold is estimated to have contracted slightly for a second straight year, plus or minus 1%. However, revenue growth is expected to trend positive 1%–2%, the 100-page report said.
One source cited in the report, Shanken Impact Databank, noted that the growth rate for the amount of U.S. wine sold has been hovering around zero since 2016 and tipped negative in the past two years.
“While there are segments and companies that will always have a measure of success, as a whole, the wine industry in the U.S. is at a pivotal point of change. The writing on the wall is legible now,” wrote Rob McMillan, founder of Silicon Valley Bank’s Premium Wine Division and author of the report.
That warning sign is the “trajectory of consumer adoption” — to what degree younger generations are adopting wine as their alcohol of choice and coming in to replace the ranks of “core” frequent imbibers as boomers age out of this critical customer category, McMillan wrote.
He pointed to several data points that show wine sales are growing for older consumers but shrinking for those younger. People 60 and older account one-third of direct-to-consumer wine sales, and their share of such sales has been growing since 2007, while the proportion of direct-to-consumer sales to younger consumers has been declining, according to Customer Vineyard and Sovos ShipCompliant data noted in the report.
The four main legal-drinking-age groups — Generation Z, millennials, Gen X and Boomers — now roughly equal in size, according to Census Bureau data in the report.
But the younger groups don’t seem to be spending more on wine as they age, McMillan noted from Customer Vineyard research.
Consumers age 40–70 are spending more on wine than their population wise would suggest. However, since 2007, age groups 40–50 and 50–60 have spent progressively spent proportionately less on wine, shifting wine spending to the 60–70 age range as they get older.
Of the U.S. population of 332 million, 251 million are of legal drinking age.
McMillan said that the data suggest that the wine industry’s efforts to reach out to younger consumers haven’t improved their adoption of wine as the beverage alcohol of choice over time, and they are actually less interested in it.
“This is telling us that whatever we’ve collectively tried to do to engage with the younger consumer in the last decade has been good enough,” McMillan wrote. “In fact, if we are doing something the results are getting worse, so you could argue that we should immediately stop doing it.”
What McMillan recommends wine marketers do better is understand that the motivations of younger consumers can be quite different from those of boomers, the generation that has driven premium sales for three decades and continues to do so.
Millennials and younger consumers are concerned about companies’ social responsibility, the healthfulness of products and whether the money they’ve saved by skipping or delaying life events such as marriage, families and schooling is well-spent on a given splurge experience or product, McMillan noted.
“Wine is not a health tonic, but it is better for you than other alcoholic beverages,” he wrote.
“The wine industry is also about giving generously for causes, advancing green practices, caring about where and how we source and grow grapes, being responsible stewards of the land and the limited water supply, using natural resources conservatively and being mindful about our partner farmworkers, often providing them the best benefit and compensation structure in agriculture.“
A encouraging sign for the premium side of the wine business long term are that consumers younger than 50 “appear wine-interested,” buying expensive wine as gifts and special occasions, though that was a trend the industry battled against in the 1980s, the report said.
Another potential bright spot for the luxury side of the business is that millennials and Gen Z are driving growth in luxury goods overall, projected to have sales growth of 21% last year and 3%–8% this year, according to Bain Luxury Report data cited by McMillan.
Gen Z and Gen Alpha are forecast to increase spending three times faster than older generations up to 2030, when they are anticipated to account for one-third of such sales.
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 email@example.com or 707-521-4256.