Mom and Dad are willing to pay up for a quality cab, but their children are saying, “No more.”
Premium wine, defined as wine priced at more than $10 a bottle, is “nearing its apex as a trend, indicated by the decline in total wine sales volume,” according to Silicon Valley Bank’s annual report on the wine industry.
The category is falling because of the difficulty in passing price increases on to consumers, and too many grapes. The current global pandemic, which is resulting in record unemployment rates, isn’t helping either.
“With an oversupply and the fact that price increases are nearly impossible against the backdrop of slowing sales, the trend and mantra of premiumization that pushed volume and price higher for the past 25 years is nearing an end,” Silicon Valley Bank’s report said.
By the numbers
Silicon Valley Bank predicted a sales value growth between 3% and 7% for the premium wine segment, which is down about 1% from the 2019 sales growth estimate.
For the off-premise retail store channel, the report predicts value will fall between negative 2% and 0%. They predicted volume will fall between negative 1% and negative 3%.
“The trend and mantra of premiumization that pushed volume and price higher for the past 25 years is nearing an end,” the report said.
“2018 was a good year for wine. Total wine sales for the year set a record, restaurant sales of wine were higher, and premium wine sales ended up as well. Strong consumer confidence and a very good U.S. economy contributed to the improved performance, but changes to long-term trends are telling us that we are at a transition point as an industry,” the report said.
Premium vineyards having an identity crisis
Beckstoffer Vineyards, the largest private grower in California, achieved a staggering sales record with $55 million worth of cabernet sauvignon sales. But the vineyard’s owner, Andy Beckstoffer, is fearful for the future of the industry.
When Beckstoffer started his vineyard, he believed that the wine in Napa “would only reach its potential if it was strategically elevated into a luxury product — scarce, expensive, vigilantly branded — even if that meant leaving behind an Arcadian era centered on small family farms and affordability,” he told The New York Times.
But now, with premium wine trends tanking, that strategy could be harmful to his businesses and profits.
“Wine is plant-based,” Beckstoffer told The New York Times. “Why don’t the millenniums drink it?”
Premium no more
Millennials haven’t taken to wine, especially premium wine, in the way the industry has hoped.
“Baby boomers, who control 70% of U.S. discretionary income and half of the net worth in the U.S., 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,” Silicon Valley Bank’s report said.
“Every piece of research shows they’re lagging,” Rob McMillan, who writes the Silicon Valley Bank’s annual report on the U.S. wine industry, told The New York Times. “It’s not that they don’t drink wine. There are just other choices. In the 1990s, there was incredible wage growth, but beer sucked. Now, guess what? Beer is good. And so are spirits.”
Customers want cheap wine during the pandemic
McMillan told The New York Times that “in the short term, the coronavirus pandemic might benefit the premium wine industry,” with data showing locked-down consumers “willing to spend up,” perhaps as they try to recreate the restaurant experience at home.
However, with a national 14.7% unemployment rate, it’s unlikely that many will be purchasing an expensive bottle of wine in the global pandemic.
“After Sept. 11, 2001, terrorist attacks and the 2008 financial crisis, the luxury wine market took painful hits. In such times, people don’t stop drinking; they just buy less of the expensive stuff,” McMillian told The New York Times.
What brands can do
Consumers and brands are expecting the price of wine to drop to a five-year low. The Silicon Valley Bank report predicts “the best wine retail values in 20 years.”
“Since it takes up to five years to bring wine to market from the initial planning stages of planting a vineyard, it makes hitting future demand very complicated. In this case, we overshot demand,” Jeff Bitter, president of Allied Grape Growers, told CNN.
Bitter recommended trying to remove acres of land or discounting bulk wine. While brands may struggle with the idea of reducing the price of their premium wines, reducing prices may welcome in a new customer who can be exposed to their products and brand.
“The past 25 years was an era where the rising tide of consumer demand lifted the boats of everyone in the wine business. We consistently saw increasing volumes and prices for premium wine during that period, and throughout it, every business model seemingly worked. But as we evolve into this new era where the tide is slack or receding, all boats won’t float, and we will have winners and losers,” Silicon Valley Bank’s report said.