West Coast premium wineries see sales slip 7% in pandemic, but profits rise equal amount: report

Expected consumer celebrations in the second half of this year after greater COVID-19 vaccine distribution are expected to bring a brief bounceback for the wine business, according to an influential wine industry report released Wednesday.

But the massive West Coast wildfires of 2020, including two big bouts with blazes in Napa and Sonoma counties, has helped balance the industry’s growing grape and wine oversupply problem since 2018, said the 20th annual State of the Wine Industry report by Silicon Valley Bank.

As consumers start to venture out to hotels, restaurants, cruise ships, airplanes, concerts, sports and other public events, sales of beverages at those venues is expected to swing the huge jump in grocery and other off-premises sales back to on-premises accounts, wrote study author Rob McMillan, founder of the institution’s premium wine division. But that growth may not last past 2022, so vintners need to be preparing their business plans accordingly.

“Even the best-run wineries in 2019 won’t find the same level of success in 2021 unless they evolved in 2020 and continue to do so in 2021,” McMillan wrote.

That’s because trends of the pandemic such as a shift to working from home for the key wine-consuming demographic, increasing relocation of consumers to the suburbs and rising growth of wine sales online are expected to shift sales away from other sales channels, according to the report. And restaurants that have survived the closures of indoor and even outdoor dining have ramped up delivery and takeout in their business models, which could lead to further reductions in the size of restaurant wine inventories, McMillan wrote.

“Wine sales through the restaurant channels will not recover to pre-COVID levels in 2021 and, more likely, for many years,” he penned in the 60-page document.

Growth in the number of cases sold last year is expected to be about 1%, which would be better than the 0.6% growth rate in 2019, McMillan said. But that growth for 2020 could vary up or down by as much as 1% if December sales soured amid a new wave of lockdowns to stem the surge in COVID-19 hospitalizations.

For makers of fine wine, average sales finished the first 11 months of the year down 7%, while one-third of the vintners in Silicon Valley Bank’s proprietary database of financials eked out sales growth.

One of the big adaptations wineries dependent on restaurant and tasting-room sales did was quickly pivot to online sales, and the average family winery saw e-commerce jump from 2% of all sales to over 10% by November, according to the report. And virtual tastings and other digital marketing efforts resulted in a major source (27%) of conversions to club subscriptions, according to Commerce7 transaction data cited in the report.

But those direct-to-consumer sales efforts came at a cost for smaller wineries, as they often discounted orders, while larger-production wineries that already were in grocery stores or shifted supply there enjoyed a rebound in bottle pricing for higher-end wines, the bank reported. While online sales for wineries were up 153% in value and 191% in orders, the average order value via e-commerce declined nearly 13%, while average order value for what was sold via club shipments or curbside from the tasting room or rose 4% and 8.5%, respectively, per vinSuite data on hundreds of thousands of transactions.

That discounting is a factor in the value of sales for smaller vintners that focus on wines over $20 a bottle expected to be down 5%–10% last year overall and averaging negative 7.1% through June, according to the report. The last time the bank found sales for its snapshot of premium wineries went in reverse was a 3.8% drop in 2009 amid the global financial crisis. Still, cost-cutting helped these vintners eke out profit overall, with average of 7.1% pretax profit, compared with 2.2% in 2009, 7.2% in mid-2019 and 5.0% for all of that year.

While larger producers were able to leverage existing access to grocery and drug stores through distributor relationships, smaller wineries that tried to move out of restaurants into wholesale in March through May found wholesalers overwhelmed, the document said.

But the common sales model of restaurants (15% of typical winery sales) and tasting rooms (28%) already was under strain in the last few years from sinking fortunes in the restaurant business and fewer wineries visited per trip. The report cites SipSource data for how much wine restaurants were ordering from distributors, and the year-over-year trend was negative: down 2.1% at the end of 2019, 6.3% in the first quarter of last year, 25.1% at mid-year after the pandemic lockdowns were implemented and nearly 36% by September.

Silicon Valley Bank’s annual survey of hundreds of West Coast premium vintners has tracked a decline in the share that restaurants hold in winery sales mixes, from nearly 21% in 2014 to 16.5% in 2018 to almost 15% in 2019 and 11% by last November.

While the first official read of the California wine grape harvest isn’t expected until the U.S. Department of Agriculture releases its annual crush report in early February. But wine and grape brokers already are expecting the 2020 crop was much smaller than the over 4 million ton crops of the past few years, based on a smaller crop earlier in the season and hundreds of thousands of tons deemed damaged by wildfires in California and Oregon, according to the bank report.

McMillan is predicting that the size of the California wine grape harvest was 3.3 million tons, or the smallest since 2011. But some wine continues to be analyzed to see if it could be salable after many months of fermentation, which releases any smoke compounds that were bound to the juice sugars.

Going into the pandemic, California had a glut of cabernet sauvignon wine in winery tanks, with upwards of 10 million gallons available for sale, according to Ciatti data cited in the report. This was wine left over from the record 2018 crop and sizable 2019 vintage. But after large wineries shifted casegoods from on-premises accounts to slake sheltering consumers’ thirst for wine, vintners started buying up bulk wine, bringing the California inventory to 2 million to 3 million at the end of last year.

Nearly 45% of wine companies the bank surveyed said they suffered some sort of impact from the fires and smoke. But only 7% said they had enough insurance coverage for the damage, and 37% didn’t have crops covered for smoke.

“Without a doubt, the smoke and fire damage in 2020 will be remembered as the largest viticultural disaster since Prohibition,” McMillan wrote. "That’s not hyperbole. We’ve suffered regional issues from pests, mold, weather, smoke and fire before, but not since the passage of the 18th Amendment to the Constitution has the viticulture industry in the US suffered such destruction over such a wide region from a single event.”

The reduction in excess wine and the unharvested 2020 grapes are expected to result in stabilizing grape and bulk-wine prices at lower levels than in the past five years, according to the bank. Following a trend of smaller grape crops across the U.S., the bank’s survey found 27% thought it was the smallest yield they’ve seen and 40% that it was below average. In Sonoma, Napa and Lodi, big cab regions that also were hard hit by wildfire, 75% of the survey respondents through that the 2020 crop was below normal.

But 55% of respondents said the 2020 vintage quality was good to excellent, but that sentiment slipped to 42% in Sonoma County and 11% in Napa.

McMillan is set to host a virtual roundtable discussion on the report and related data at 9 a.m. Wednesday.

Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at jquackenbush@busjrnl.com or 707-521-4256.