Premium wineries rebound in 2021 but face tough sell with younger consumers, study says

While the premium wine business enters 2022 in much better shape than it did when tasting rooms and restaurants were closed the first year of the pandemic, the industry’s long-lingering challenges with adapting to change — particularly, attracting younger consumers — are hampering the recovery, according to a closely watched report from Silicon Valley Bank.

Optimism among premium wineries seems to have rebounded. Nearly three-quarters (74%) of such producers that responded to the bank’s survey for its 21st annual State of the Wine Industry Report, released Wednesday Jan. 19, said last year was a “good” (21%), “one of our better years” (24%) or “the best year in our history” (29%). That’s a flip from the 43% responding in 2020 that it was “the most difficult year in our history” (11%) or “one of our most challenging years ever” (32%).

The bank roughly defines this “premium” tier as an average bottle price of around $20.

And another factor fueling that rosier sentiment was the institution’s review of upwards of 150 premium vintners in its database of financial statements. While sales growth for such producers has been trending downward since the heyday of 28% growth in 2000, it jumped to 21% last year, the highest rate since 2007 just before the Great Recession and coming off -0.6% growth in 2000 amid the pandemic.

The bank found from its database that premium vintners discounted heavily (average case price down 8%) in 2020 and moved more cases (up 6.3%). Yet last year with reopening of tasting rooms and restaurants they scaled back discounts — namely, included shipping — and sold fewer cases, partly to stretch vintages to cover the smaller 2020 harvest, the report said.

Average pretax profit jumped to 19.1% for these wineries as of September last year, from 7.4% at the end of 2020 and 5% in 2019, the bank’s financial-statement analysis found.

For overall wine sales, report author Rob McMillan, senior vice president and founder of the bank’s Premium Wine Division, estimates that growth in the amount of wine sold last year was negative 2% to flat, compared with 2020, but the growth in value of those sales could be flat to up 2% from higher markup in reopened restaurants.

But one disturbing data trend McMillan noted in the report was wholesale depletions for spirits and wine — how much distributors are removing from warehouses to restock stores and restaurants — through the pandemic closures and with the reopening. Based on SipSource figures, depletions were tracking in positive growth territory for both types of libations up until the further reopening in early 2021 with wider distribution of vaccines.

While monthly spirits depletion growth continued in the 5%-8% range, wine depletions growth fell into the negative in March 2021 and continued falling, reaching negative 8.9% in the fourth quarter.

"Sadly, the obvious takeaway from this figure is that consumers shunned wine and chose spirits during reopening celebrations,“ McMillan wrote.

Factors he suggests for these diverging depletion trends for spirits and wine with reopenings include aging of boomers, more consumers drinking spirits and beer as well as wine, anti-alcohol messaging, higher prices charged for wine in restaurants and changing values for younger adults in what beverage alcohol they prefer.

"One of the reasons that wine is losing share has to do with consumer change and the wine industry’s inability to recognize or adapt,“ McMillan wrote. ”We’ve seen this story before with the beer category and should learn a lesson from their experience.“

He noted that Nielsen found that the average cost of per ounce of wine in restaurants is 72% higher than for spirits.

But good news for premium wineries is that tasting room sales rebounded, with a 275% rebound in point-of-sales volume from the beginning of 2021, when many California venues were still under restrictions, to the end of the year, the report said.

And a quick shift a number of premium vintners made to online marketing and sales to survive tasting room and restaurant closures may be sticky with consumers post-pandemic, the report said. While wine e-commerce sales value was 12% below that of wine sold through conventional distribution in the fourth quarter of 2020, online sales last year were 146% higher than they were in 2019.

And by late last year, online sales were still making up nearly 10% of the bank’s database of premium wineries, though McMillan expects that to fall back to 4% to 6% of sales when restaurants and travel are fully reopened.

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.