Until about mid-March, wine-market analyst Rob McMillan was focused on issues that, in a doomsday scenario, could pose an existential threat to the American wine industry. But then the novel coronavirus showed up, and wine sales have shot up by, in McMillan’s estimation, a net 10 percent even after subtracting large losses from restaurant and tasting-room sales, softening for now at least the need for gloom-and-doom sermonizing.
McMillan calls wine a “comfort” beverage, and this is “a time of crisis.” Still, he sees this ironically positive news as only “a reprieve.” The underlying issues, none greater than shifting demographics and the increasingly worrisome economic realities confronting potential new imbibers, remain unchanged, which means his mission also remains unchanged: “trying to get the industry more engaged in targeting young consumers. We’re doing a poor job of that.”
McMillan, who founded Silicon Valley Bank’s Wine Division in the early 1990s and is arguably the country’s most astute number-cruncher when it comes to trends in the West Coast wine world, has no vested interest in proffering either good or bad news. Neither he nor his bank, which is best known for its global reach in the world of technology, have any vested interest in the wine business. Although McMillan has a small cellar in his Napa home, he doesn’t go to sleep dreaming about 100-point Robert Parker bottles. Despite having come a long way from his “7-Up-and-white-zinfandel days,” he’s a data geek, not a wine geek.
Here are some highlights of McMillan’s recently published, 71-page “State of the Wine Industry Report” that turned my head. For example, the seven “headwinds” confronting wineries and companies that sell wine (most of what follows are direct quotes from the report):
* Baby boomers, who control 70 percent of U.S. discretionary income and half of the net worth, are moving into retirement and declining in both their numbers and per capita consumption while millennials aren’t yet embracing wine consumption as many had predicted. In part, McMillan thinks that’s because the industry hasn’t done nearly enough to push the message that wine is as natural and unadulterated a beverage as exists, which would resonate with younger, more health-conscious consumers.
* The industry has reached the point of acute oversupply because of diminishing volume sold. That will lead to vineyard removals — and fallowing in some cases — and reduced returns for growers … We are at a position of oversupply across the entire supply chain. That extends through retail and every growing region in California at every price point. For California, this is the worst combination of market conditions for growers since at least 2001 and perhaps of all time.
* Absent offsetting promotion of the health benefits of moderate wine consumption, the cumulative impact of negative health messaging will continue to cast a shadow over consumption, particularly for the young consumer.
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* Wine imports and substitutes are a real and growing threat for market share among emerging wine consumers.
* A lag in innovating alternative (direct-to-consumer, or DTC, sales) strategies beyond the tasting room and club models is limiting DTC growth for family wineries.
* Wine companies aren’t addressing the values of the young consumer in their marketing. We aren’t giving them a reason to buy wine over spirits, particularly since wine is much more expensive on a per-pour basis. According to Nielsen, the data-measurement company that McMillan relies on heavily, it costs $1.02 for a 12-ounce serving of beer, $0.88 for a 1.45-ounce serving of spirits and $1.51 for a 5-ounce pour of wine. That lower price per serving is a clear part of the success story of spirits today. And, back when baby boomers had the discretionary income to embrace wine, McMillan reminds us, “most beer sucked.” With the explosion of craft breweries, that’s no longer the case.
* Labor availability is limited, and the price for labor is increasing.
But, lest you think he’s a total grump, McMillan also noted encouraging “tailwinds”:
* With a good 2019 U.S. economy, Gen-Xers and boomers are demonstrating spending resilience and still increasing their purchases of wine above the $9 bottle price. That created another year of record U.S. wine sales by value last year.
* The large millennial population hasn’t begun to embrace wine — it’s the wine industry’s largest opportunity.
* Acute oversupply will allow for better-quality juice in lower-priced bottles, which improves value and will provide an incentive for some millennials to become more consistent wine buyers.
* The better-quality regions of Oregon and Washington remain on a strong double-digit growth path. Producers with long-established brands and those with good distributor relationships continue to perform above their peers.
* The number and diversity of retail concepts and locations selling wine continue to grow to record numbers.
* The business is developing both strategies and tactics around the DTC channel and continues to show sales growth through this path.
It’s the latter, of course, that has been driving the train of late with that penultimate “tailwind” in the tank for now, and possibly permanently. McMillan would be drowning his sorrows in a whole range of adult beverages were his gig tied to commercial real estate. He says our “lifestyle” changes are likely to be lasting — goodbye, and good riddance, to numbingly long daily commutes — and that’s ultimately good for moving wine.
“People are at home at 5,” he said. “They’re not going to restaurants. No matter how you define a family, people are sheltering at home, and they’re having meals together. They’re cooking. And even if my cooking consists of opening a can of chile, I can have a nice bottle of wine because, damn it, I deserve it. It’s a little luxury, and it gives me some sense of a normal life.”
Also, when sipping at the dinner table, they’re not subject to still often-ridiculous restaurant wine-pricing markups, which profits neither grape growers nor wine sellers.
sportywineguy@outlook.com
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