Napa Vineyard-A world premier wine region.
I recently read two articles in the Sonoma Index-Tribune from two authors concerning indications that the wine industry may be headed for changes in ‘sea state’. The thrust of both articles was posed by way of a question: Is Northern California wine industry reaching ‘peak wine’? Do such questions imply: Has wine peaked and will market growth put a cap on expansions-in vineyards and wineries in California for “X” year? From an Industry Lifecycle viewpoint, does wine industry data point to a transition to a ‘maturity’ phase or worse?
What are some of the indicators and what can the wine industry do to anticipate and adapt to possible slowing in growth; assuming there are changes on the horizon? Peak wine, what does that really mean? This subject is not easily explained or answered with a simple yes or no. The answer ultimately is dictated by the consumer, whose tastes, budgets, and demographics are changing; especially with millennials. Further, consumers are being influenced by new alcoholic beverage products such as craft beer. Yes, even craft breweries are having issues with accelerating lifecycle issues. To the craft styles we now add cannabis.
Industries and products go through ‘lifecycles’ that are precipitated by: innovation/technology, competition, branding, evolving taste, mores, politics and financial issues. We know wine is not immune to changes in consumer perceptions and taste. Wineries can/do have a place in directing consumers to new wines, branding and how consumers will respond to industry marketing. Remember when white zinfandel was the rage; those days are gone. Tom Marquardt and Patrick Darr wrote in June 2017, white zinfandel has been in decline for at least 2 decades. They called white zinfandel “plonk”. Yes, a wine has a product lifecycle too.
Rob McMillam, EVP of Silicon Valley Bank Wine Division has been a proponent of the assumption that California’s wine industry is becoming stagnant relative to past growth performance. He reported, “The US wine industry is at the tail end of its largest growth period in history.” Change is a constant, however, one year does not necessarily make a trend. For example, some indicators show, from 2016 to 2017 there was relatively constant grape production (USDA & NASS), but this is just one year; what about previous years? Wineries experiencing a slow-down do not keep pushing head-long into fruit purchases is my premise.
Wine is part of the fabric of culture, lifestyle, conviviality, celebration, and food; all things we live for and are around. Our founding fathers spent time trying to build a wine industry in America so let’s accept some fluctuations in the market; wine is not like the hula hoop industry.
Some leading indicators analyst employ in assessing a pullback in the wine industry (especially in Northern California):
- Changes in grape demand and production- bearing/non-bearing acreage.
- Prices of fruit.
- Crush tonnage numbers.
- Wine products and marketing changes being offered-blends, AVA branding, varieties, etc.
- Consumer packaging changes-cans, boxed wines and label enhancements that give consumers access to more information.
- Effectiveness of direct to consumer interfacing tools-tasting rooms, shipping options and internet communications, CRM based information pushed to consumers.
- Costs and changes in costs: regulations, land, labor, taxes, etc.
Fast changing consumer preferences for wines are expensive for wine makers to address. But such changes are not necessarily indicative of a contraction in wine consumption. According to numbers published by USDA and NASS (National Agricultural Statistics Service) in Sacramento, CA, over 83% of U.S. grape crush production is from California grapes; these numbers do not indicate an impending plateau today or in the future for wine industry; my view.
According to USDA, National Agricultural Statistics Service in Sacramento, CA the wine grape production (tons) is relative flat:
- 2018 (Est.) 4.100 million
- 2017 4.014
- 2016 4.032
- 2015 3.705
- 2014 3.895
- 2013 4.245
Note: “Total crush” ton numbers from processors (mostly wine related) do include table grape numbers for Thompson (a table grape) which can be used in winemaking. Wine grapes only are the numbers I have used for this analysis.
Some of the early empirical and anecdotal signs the wine industry is delicately approaching a slowdown will probably prompt the industry to respond now rather than later. Maybe now is a good time for the industry to look at how they are preparing for such a potential. When times have been good to an industry, producers tend to let poor planning and execution practices continue without being addressed.
Supply, Demand and Prices
Since 2013, California acreage in wine grape vines (not referring to table and raisin grapes) has held constant at 560,000 acres. There has been, relatively speaking, no change in California acreage planted in wine grapes, however the tonnage production from California acreage has increased 27 percent from 2006 to 2016. The average price increase in grapes has increased by 55 percent in that same period. (More specific data on varietal fruit prices follow). Point being, acres in vines is a constant, yet production has increased as has prices. So, it might be reasonable to assume vines are planted and existing vineyards maintained based upon current and forecasted future demand.
Wine grapes crushed in 2017 totaled 4.014 million tons (wine grapes only) and was down less than a 0.005 percent from 2016 and up by 8 percent over 2015. 2016 seems to have been a good year for harvest for California wine districts. It is important to look at the trend when looking at grape production. Probably, weather, climate change and fires impact California production significantly; wild fires impacting Napa, Sonoma, Lake and Mendocino Counties started in early October 2017.
Year after year red wine grapes have increased in per ton value since 2010 to 2017; by 54 percent. Conversely, white wine grapes have seen an 18 percent increase. The price of premium Cabernet Sauvignon grapes in Napa is about $7,500 per ton and in Sonoma County, heavily weighted toward the Chardonnay grape, that variety is $2,800 per ton.
If winemakers understand their markets, and they do, they obviously understand what Mike Veseth, Editor of “The Wine Economist” says about higher wine prices, “Napa producers need to get at least $75 a bottle retail for their wine to justify these prices, which they don’t seem to have had trouble doing recently.” There is obviously demand for that quality of wine. Currently the sweet-spot for quality wine is $10-$14 per bottle.
On a long-term basis, over the past 20 years wine grapes price per ton have seen a 36 percent increase compared to a 31 percent over the past 10 years and a 6 percent increase over the past 5 years. Industry growth over the past 2 years has been about 2 percent and over the past 10 years U.S. consumption has been up 22 percent.
As far as price, value and demand considerations go, there does not appear to be a major shift in how winemakers are buying grapes. But, the surplus bulk market has been relatively successful in absorbing any surplus’. Nonetheless, approaches to potential concerns for the industry, varies based upon size of the winery, a winery’s legacy products, strategic planning, etc. But all must respond to events that negatively affecting the wine business.
Following are some issues to maybe think about.
Today consumers seem to be more informed about wine and other beverage choices which translate to more competition for the wine industry from growing alcohol categories called “craft” beer and spirits and ciders.
Kate Williams writing for Sonoma Index-Tribune, has drawn attention to selected data from a winery owner in Sonoma and comments from a day-trip coach services owner who conducts wine country tours. All have commented that their business has experienced a significant drop off in business this summer. Some reasons they offer for a plateau and drop in their business are:
- Consumers are more frugal and resist significant tasting room fees and wine pricing.
- Lack of branding due to costs and frequency of ads to encourage visits to the winery.
- Wineries do not understand the opportunities of having an internet presence.
- Consumer awareness of Northern California fires does have an impact.
- Industry may not be keeping pace with new approaches to the tasting room experience. Baby Boomers and Generation X consumers have a different approach to wine than do Millennials.
Generally, some people feel, wineries need to better understand changes in the Direct to Consumer sales, tasting room selling, direct marketing, club sales and utilizing an on-line presence. And maybe, there is a lack of customer centric approach to wines.
One winery owner Williams interviewed commented that “as long as you’re consistently making good wine, customers will come.” But a winery is not a baseball field. In the 1989 movie “Field of Dreams” the actual quote in the movie is: “If you build it, he will come”. Most people remember it as, “…they will come”. That can be a very risky approach. One explanation of the quote might be: “If you build it, you increase the odds of them (customers) coming. In other words, if you put thought and you put energy into a project you increase the likelihood of success,” says Thomas DeMichele. Planning based on sound analysis and execution goes a long way to success.
Lifecycles in the wine industry force people to stay competitive, be creative, plan and develop new avenues for revenue and implement new innovations. It might be said that the most cost-effective way to stay ahead of any wine industry plateau, or even a slight pull-back, is to be customer centric, communicate with the market, and stay current with all on-line/website tools such as CRM (Customer Relationship Management) tools.
How has on-line changed the way consumers buy wine?
- Internet research by consumers expands their pricing knowledge and wine ratings.
- Large segment of the market consumes wine and buys by price-Gen Xer’s and Millennials.
- More wine options come about as more wine labels come into the market via the internet.
- Better options to try new wines, especially in major markets such as: tasting rooms, Direct-to-Consumer sales, wine club promo’s, PR, etc.
- On-line offers improved branding opportunities for wineries and availability of strong competitive analysis.
The in-house data available for free from an on-line CRM system and website is amazing. Google Analytic offers real-time data about what interests people coming to your site, what they looked viewed and how long they were on the site. Most importantly, you can tell if there was a conversion.
If a winery anticipates and is prepared for any market changes they will be more successful in engaging change.
Changes in Tasting Rooms
I have spent the last 20 years dealing with on-line marketing. Obviously, I am a fan of this channel of distribution and for interacting with the customer; this latter point on interaction refers to tasting rooms. Today, the format for a tasting room is an experiential event. Some are now becoming “lounge restaurants” or tapas bars like started being popular in the early 2000’s. I do have some questions about an approach that encourages a lounging effect, like a private club, that does not close a sale or interaction with consumers.
Relative to a wine product, I believe in relationship selling, counseling and directing the consumers experience. Further, creating a branding experience that is reinforced on-line, in advertising and word-of-mouth.
Ultimately, customers want a respectful experience and have their major objections answered: Why should I like and buy your wine? A producer of wine must sell the wine to stay in business. Should a tasting experience become a Starbucks setting where people buy one glass of wine, open their laptops and spend the day? Obviously, If a winery does not sell wine they are no longer a winery.
In a very limited sampling I contacted six wineries in Napa and Sonoma to understand their ever-evolving approach to customers via their tasting rooms. Tasting room fees ranged from $25 to $75 per person; none offered a refund of the tasting fee on a purchase of wine. Two of the six wineries did offer a premium priced, high-end tasting experience that involved limited food selections.
Another trend is offering tasting rooms in a commercial environment in city squares and town centers. Virginie Boone, writing in Wine Enthusiast, calls them “tasting studios”. “More sit-down tastings, food pairings and places to hang out and Instagram their day. That’s not to mention more of a sense of belonging,” elaborates Boone. Will these experiences showcase the product and specifically build a relationship with the creator of the wines? Time will tell, but relationships do sell most any product; what is the best way to build a relationship with a winemaker and understand their creation better.
People want to feel they got an experience that is unique, respectful, reliable and quality.
CRM, On-Line, DtC, Clubs, Labels-all combined and you could be drowning in data in no time.
Are you getting the most data available from you customers, tasting room visitors, on-line orders, customer queries (Contact Us) in such a way that is respectfully, builds relationships and experiences? As a wine producer, what are they doing to anticipate less market growth, new competition, changing business models and constantly building a brand? Probably they all need reliable, timely and accessible data.
What can a wine producer get out of a CRM program, even a free CRM system; there are many?
- Knowledge about the customer; far beyond name, address, etc. For example, the real jewels: top 100 customers, when they buy, their preferred wines, responses to promos, friends they have recommended to buy your wines.
- Marketing metrics will provide data by channel of distribution, distributor, advertising program results, etc.
- Historical data is available on customers, products, revenues, costs, new market potentials. And you can document campaigns-e-mail, direct mail, site visits, etc.
Even simple programs like NFC (Near Field Communication) tags in labels or on bottles, can provide important CRM information at point of sales (retail). Even QR coding will render information.
AS a channel, there are indicators that restaurants are selling less wine but the wine they do sell are at higher price points, so revenues have stay relatively constant. But for restaurants, volume does make a difference. Selling fewer bottles of wine or by the glass can have an exponential impact on prices eventually; decreased selection will impact the cost to support wine service.
It is probably out of the question to see water turned into wine. But, changes will occur in wine industry. Here are some final thoughts.
The consumer will ultimately be impacted by paths taken by vineyard and winery owners. Just read any of the many books about California wine country and one see’s numerous changes in how wine is marketed; case in point is Robert Mondavi. But, the philosophy of “build it and they will come”, relative to wine, seems to be a questionable strategy.
Kate Williams highlights the growth in U.S. wine sales since 1993 to 2018 as more than doubling to 770 million gallons of wine. Even crush numbers have continued to accelerate over the past 20 years. Yes, in some years there were concerns for the industry due to weather and fires, but a 3.8-million-ton harvest for California is not a record. In 2016 and 2017 the state of California had a crush of just over 4 million tons each year.
There are always concerns about the potential of success for the small producer as opposed to the behemoths. But, all wines are crafted. The “craft” moniker seems to work well for the small beer and spirits producers and it can work for small wine producers
As the consolidation in the Three Tier Distribution system keeps inexorably moving on, the stage is set for small wine producers to control more of their destiny.
Markets do change but the beverage called wine will endure. It may not look the same in 20 years, but it will still be part of cultures. If plastic straws are now the bane of human existence, how long before glass bottles become extinct. Heck we have wine on tap with recorded sounds of popping corks.
In the last decade we have seen mechanization move forcefully into the vineyard. Workers are hard to find, expensive support systems to support vineyard works are mandated by laws, cost of labor is increasing, and federal laws are making availability of labor questionable. In addition, the industry has been helped with research from UC Davis, CSU Fresno, Cornell U., U. of Arkansas, etc. introducing improved variety vines that enhance yield, are more tolerant of drought and diseases.
It does seem to the uninitiated, the real challenge to surviving as a profitable wine enterprise lies with marketing (price, place, promotion, product, and people), planning and better use of data. The nimble and strong do survive.
Obviously, Mr. McMillam is smart, knowledgeable and has a great track record in the industry. Hopefully, he is forecasting only a period of reduced percentage growth for the California wine industry and return to splendid growth shortly.
I want 100-point wines at $5.00/ bottle and great tasting room experiences, barring that, I’m still happy!