Will California North Coast fine wine pass a ‘tipping point’ in 2018?

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Two key matters on the horizon for the fine-wine business in the North Coast in 2018 are whether fine-wine sales will continue the strong, steady climb and the possibility of another large direct-to-consumer market opening nationwide.

Some industry analysts have been warning that the wave of wine sales growth the industry has been riding may be subsiding, based on certain sales data and company financial results.

Rob McMillan, founder of Silicon Valley Bank’s Napa Valley-based Premium Wine Division and author of an oft-cited industry report and forecast each Januaryrecently wrote on his SVB on Wine blog that the wine business is at a “tipping point” of decelerating growth in sales of premium-priced wine, generally considered to be retail-priced at more than $9 or $10 per standard 750-milliliter bottle. He was quick to remind his readers and the Business Journal that declining growth doesn’t mean declining sales.

“We went through a fairly good growth period postrecession,” McMillan told the Journal. “Since the end of 2015, we have noticed the growth rate has been growing slower in a lot of (price) segments, not just high-end wine.”

He pointed to store checkout-aisle scan data from Nielsen that shows a downward trend in sales growth for wine since January 2016, from nearly $250 million added that quarter to $50 million in May of this year. Sales in the $9–$12 segment actually declined through the first-half of this year, and the $12–$15 segment just remained in positive territory.

2017 SALES

With a month still to go in the key retail period of October, November and December (often shorthanded as “OND”), the best estimate is for 2.5 percent growth in 2017 U.S. wine sales volume overall, according to Jon Moramarco, managing director of BW 166. The Santa Rosa-based industry consulting firm co-publishes closely watched The Gomberg Fredrikson Report and other drinks-business analytics.

“That’s slightly less than the trends over the last 15 years, that have been about 3.5 percent,” Moramarco said. A forecast on December wine sales, and full-year results, is expected to be released in mid-January, followed by a report on official data in late February or early March.

Most of the growth has been driven by wines retailing for over $12 a bottle. There has been some softness in sales for low-priced wines, under $6.

“In general, the market is healthy, especially when you’re talking about the type of wines produced in the North Bay,” Moramarco said. North Coast wines typically have a suggested retail price of $15-plus.

Whether North Coast wineries will have too much or not enough wine from the 2017 harvest to satisfy sales growth will take a few months to sort out, McMillan said. Vintners have told him inventories of wine appear on par with demand, changes could also affect continued strong growth in pricing for choice North Coast grapes and the vineyards that produce them.

“Growth in grape prices in the last five years may have hit a natural apex,” McMillan said. “It would not say they will drop, but we will likely see a flattening. And they likely will for real estate, as well, but that’s partially driven by (merger and acquisition) activity.”

Major wine M&A players have made big buys in the past few years and now are working their prizes into their operations.

“It is hard to make money at the bottle price you would have to charge for what is being charged for bottles and vineyards,” McMillan said.


While spending on wine overall continues to grow, albeit at a slower pace, U.S. consumers have been consistently shifting where they eat and imbibe over the past 30 years, Moramarco said. More of their food-and-beverage spending is going toward what they’ll consume at home, rather than on the premises of the restaurant or other eatery.

“Both on- and off-premise spending are growing at the same rate,” he said. “But on-premise(s) spending for wine has slowed from what people have historically seen it to be, but it does seem to be a consumer change.”

They’re taking food and beverages home for meals or having them delivered.

“People are changing their habits a bit,” Moramarco said. “Younger people have different expectations of their life and what they want to do versus the older generation.”

This is reflected also in financial struggles for a number of traditional restaurant chains nationwide, as growth for fast-casual eateries and at independent restaurants, McMillan said.

“Fast-casual is a little bit harder to penetrate with wine,” he said.

The format is a blend of the takeout convenience of fast food with the better menu options of casual dining.

“People may come in and sit, but maybe they do not have time to enjoy a glass of wine,” McMillan said.

Some of this shift is seen in continued strong growth in direct-to-consumer (DTC) wine sales, Moramarco said. Instead of brought within the consumer’s grasp via the three-tier distribution system of producer, wholesaler and retailer, DTC sales include wine shipped directly from the vintner or retailer as well as bottles purchased at the winery tasting room.

There have been indications that consumers are capping how much they will spend on a bottle of wine, trending toward $15–$20 in recent years, Moramarco said.

“That’s not different than 25 years ago, when people didn’t want to spend more than $5 and 15 years ago they didn’t want to spend more than $10,” he said. “There are psychological barriers to how much they will spend ‘X’ amount of their pocket for wine, but obviously there is a lot of wine being sold above $20, and that market continues to grow, especially with direct-to-consumer.”


Also part of the wine retail channel shift is slowing growth in how much is sold in grocery stores, Moramarco said. Wine sales had been growing faster in traditional grocery stores than the overall wine market for the past 10 years, as consumers shifted more of their wine purchases there. That growth appears to have moderated recently, he said.

“Grocery has equalized the share of wine that it has,” Moramarco said. “Consumers are doing more of their shopping at Trader Joe’s and other (wine retail trade) accounts that aren’t reflected in scan data.”

The Southern California-based retail chain, owned by a German family that also owns grocer Aldi, doesn’t provide sales data from its checkout scanners to retail-analytics giants Nielsen and IRI. Also not participating are Walmart, major wine retailer Costco Wholesale and a number of fine-wine retailers.

But the research firms poke into sales activity at such outlets by recruiting panels of consumers — Nielsen HomeScan and IRI Consumer Network — who scan what they buy and report the data.

One indicator of the challenge in gauging the trajectory of fine-wine sales from scan data is that the volume of wine sold for over $20 a bottle is higher for direct-to-consumer sales than is reflected in scans at grocery, drug, liquor and club stores, Moramarco said.

For example, wine sales through Costco were $1.8 billion last year — $1.3 billion of that from fine wine, the company’s financial chief told Forbes. And U.S. direct wine sales were about as much, up 18.5 percent last year to $2.33 billion, according to ShipCompliant.

“It’s more channel shift than true weakness in the market,” he said.


With the Granholm decision out of the U.S. Supreme Court in 2005, the world of direct sales to consumers in other states started opening dramatically.

Today, direct-shipping by out-of-state producers is allowed to varying degrees by all but five states: Alabama, Delaware, Kentucky, Mississippi, Oklahoma and Utah, according to ShipCompliant.

But one of the lingering questions from the decision has been whether out-of-state retailers have the same constitutional right as in-state retailers to deliver wine. That quandary came to a head for retailers this fall, when top couriers UPS and FedEx halted shipments by out-of-state retailers.

Currently, retailers can ship to only 14 states, not including the big wine markets of Texas, Florida, New York and Illinois, according to Tom Wark, a Napa-based industry publicist and executive director of National Association of Wine Retailers (WineFreedom.org), a trade group of 60 wine retailers across the country.

Two test cases potentially headed to the nation’s top court in 2018 are Lebamoff Enterprises vs. Snyder from Michigan and Lebamoff Enterprises vs. Rauner from Illinois. Opinions from lower courts have been mixed on whether Granholm’s nondiscrimination standard also applies to out-of-state retailers. One concern from proponents of equal footing for all retailers is that some that don’t ship to consumers in their own state will push for a ban on all such shipments to avoid competition, Wark said.

“One thing that is not understood is that a ban of out-of-state retailers would mean no other sources of imported wine,” Wark said. “If you live in Michigan and want to get first-growth (Bordeaux wine) and can’t find it locally, you can find a number of retailers around the country that will ship it to you. But in Michigan, it’s not allowed.”

Among the benefits of Amazon’s purchase of Whole Foods Market is its retail licenses in a number of key states, making Whole Foods an in-state shipper there, Wark said. The giant e-tailer plans to shut down its Amazon Wine venture by the end of this year, thought to be because of regulatory issues over being marketplace now with a grocery subsidiary.


With continued growth at the higher end, smaller wineries are focusing more of their sales and marketing dollars on direct-sales efforts, and large vintners tend to be allocating more resources to higher-end brands, Moramarco said.

That “premiumization” shift by the big players is reflected in a string of acquisitions in the past few years of higher-end vineyards and brands. Examples include E&J Gallo’s acquisition of 600 planted acres of the upper-tier Stagecoach Vineyard in Napa Valley, and Constellation Brands’ acquisition of The Prisoner brand portfolio from Napa’s Huneeus Vintners.

Though the deadly October firestorm didn’t burn down Wine Country, as many outside the area have taken to believing after extensive media coverage, the region has a major marketing task ahead of it in the coming year of attracting back the millions of visitors who stream into Napa, Sonoma, Mendocino and Lake counties annually, according to McMillan. But there’s opportunity in all the attention to update the world on what’s happening after the fires.

“It’s a time when the message can be more focused, and consumers are a little more ready to receive news that the wine industry is fine,” he said.

Jeff Quackenbush (jquackenbush@busjrnl.com, 707-521-4256) covers the wine business and commercial construction and real estate.

CORRECTION: Tom Wark did not lead the Free the Grapes effort to overturn law against direct-to-consumer shipping.

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