Report: North Coast wine growth to get tougher

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Sales of U.S. fine wine like that produced in the North Coast are projected to be in double-digit growth territory again this year, with more room for price increases, according to a newly released closely watched industry forecast. But local vintners should prepare for a break in the two-decade climb in wine consumption as younger drinkers start to dominate and must anticipate more competition as large producers go upscale and high-priced bottled imports return.

“While demand for premium wine will increase this year, there are clouds on the horizon that should be considered,” said Rob McMillan, founder of Silicon Valley Bank’s Wine Division and author of the lender’s 15th annual State of the Wine Industry report, released Jan. 21. “We believe total and per-capita wine consumption in the U.S. will drop for the first time in more than 20 years due to emerging generational shifts in consumption patterns that we see accelerating in the near term. We believe this is the case, since there is a permanent shift from generic wine, and aging baby boomers are being replaced by frugal millennial consumers. Millennials, at this point in their development, have proven more agnostic in their choice between beer, spirits or wine, compared to retiring boomers.”

The mature generation of consumers, those older than 68, slipped to last place in fine wine consumption in 2015, at 11 percent of the share of purchases tracked in the bank’s annual survey of industry executives, according to the 76-page report ( That was behind 16 percent share for millennials (ages 21–37), 32 percent for generation X (38–49) and 41 percent for baby boomers (50–67). The report noted that millennials passed matures last year in all price points.

Boomer share of wine purchases in the survey has been in slow decline for the past few years, and the median age of the generation will be at retirement in five years, the report noted. Gen X share of these wine purchases is projected to pass those of boomers in 2021, and millennials will pass gen X in 2026.

The report said U.S. producers should be concerned about evidence that millennials “substitute craft beer and spirits for wine, especially on-premise, and are ambivalent as to its place of origin” and that the 2015 Gallo Consumer Wine Trends survey “found millennials are also four times more likely to select a wine based on its label where they look for personality and originality."

Indeed, the bank’s survey found industry executives are more worried about competition from wine substitutes such as craft beer, spirits or even legalized marijuana, followed by competition from bottled imports and availability of enough skilled labor for the vineyards.

U.S. fine-wine sales are forecast to grow this year 9 percent–13 percent, according to the report, based the bank’s peer group sampling of financial reports from its 300-plus West Coast winery and vineyard clients. That would be down from the estimated 2015 sales growth of 15 percent, which would be at the low end of the bank’s 14 percent–18 percent growth prediction a year ago.

Sales for the report’s peer group of producers were up 10.7 percent through September last year, 2.5 percentage points ahead of that period in 2014, not counting the October–December period in which 60 percent of U.S. wine is typically sold.

Looking at the overall premium segment, wine retailing for the equivalent of $10-plus per standard 750-milliliter bottle, sales this year are projected to increase 4 percent–8 percent.

Last year was the first time since the Great Recession that premium wineries were able to pass higher costs onto consumers, and 62 percent in the bank’s annual survey of industry executives said they plan to do so this year. Larger wineries were more confident in their pricing power than smaller producers, a skew the report attributed to differences in the path to market for distributed brands vs. those sold directly to consumers.

Premium producers will be able to increase prices 4 percent–8 percent this year, with greater flexibility for large vintners, the report predicted.

“While retail bottle prices will modestly increase this year, the consumer will still benefit from three consecutive large and excellent harvests in 2012, 2013, and 2014,” McMillan said. “Not all of that wine will make it into branded premium labels and that will leave plenty of great juice available for domestic négociants who will repurpose it into imaginative labels.”

The ongoing “premiumization” of the industry is eroding sales of wine retailing for less than $8 a bottle, leading to tens of thousands of more acres of winegrapes positioned toward lower-end wine likely being removed in California’s Central Valley, the report said. As options for more vineyards and wineries in the North Coast are scant or dwindling from lack of land or project opposition, the market for acquisition of wine-related properties is increasing as large producers secure fruit sources, brands and production capacity and investors seek income-producing property, the report said.

When asked about local public perception of wine tourism, 71 percent of Sonoma County industry executives told the bank they felt it was “welcome,” and 28 percent “unwelcome.” The perception in Mendocino County’s Anderson Valley was similar, 70 percent and 30 percent. But in Napa County, the split was 52 percent “welcome” and 47 percent “unwelcome.” For the bank’s survey base overall, nearly 80 percent said wine tourism was “welcome.”

Recent examples of wine merger and acquisition activity by large players include Treasury Wine Estates’ purchase of much of Diageo’s wine business and E&J Gallo’s acquisition of several brands and properties.

A surprise in the bank’s report came when looking at on-premise wine sales, historically a key channel for smaller, higher-end producers. Across all scales of producers the bank surveyed, on-premise sales share was about 18 percent last year, down from just over 30 percent in 2014. For the largest segment selling to restaurants, vintners producing 10,000–25,000 cases annually, on-premise share dropped to about 23 percent in 2015 from about 43 percent.

"We believe the reasons for this change are explained by more at-home consumption and a behavior change of our frugal millennial consumers who are more likely to satisfy their restaurant consumption needs by starting with a beer or cocktail, then having a glass of wine rather than a bottle of wine with dinner,” the report said.

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