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.